Hub International (HBG) 10-K 2003 FY Annual report

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

[X]	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the fiscal year ended December 31, 2003 Or
[  ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

Commission file number 1-31310

HUB INTERNATIONAL LIMITED

(Exact name of Registrant as specified in its charter)

Ontario, Canada	36-4412416
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
55 East Jackson Boulevard, Chicago, IL	60604
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code:

(877) 402-6601

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Title of Each Class	Name of Each Exchange on Which Registered
Common Shares, no par value	New York Stock Exchange Toronto Stock Exchange

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.     Yes x     No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     x

Indicate by check mark whether registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).     Yes x          No o

The aggregate market value of the voting stock held by non-affiliates of the registrant (i.e., other than directors, officers, or holders of more than 5% of the registrant’s common stock although such exclusion is not intended, nor shall it be deemed, to be an admission that such persons are affiliates of the registrant) computed by reference to the closing sales price on the New York Stock Exchange on June 30, 2003 was $299,261,012.

The number of shares of the registrant’s common stock, issued and outstanding as of March 3, 2004 was 30,299,170.

Documents Incorporated by Reference

Those sections or portions of the registrant’s definitive proxy statement filed or to be filed with the Securities and Exchange Commission pursuant to Regulation 14A (the “2004 Proxy Statement”) involving the election of directors and other matters at the annual and special meeting of shareholders of the registrant to be held on May 11, 2004, are incorporated by reference in Part III of this report.

HUB INTERNATIONAL LIMITED

TABLE OF CONTENTS

	Page
PART I
Item 1. Business		4
Item 2. Properties		16
Item 3. Legal Proceedings		16
Item 4. Submission of Matters to a Vote of Security Holders		16
PART II
Item 5. Market for Registrant’s Common Equity and Related Shareholder Matters		17
Item 6. Selected Financial Data		17
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
Item 7A. Quantitative and Qualitative Disclosures about Market Risk		38
Item 8. Financial Statements and Supplementary Data		39
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		69
Item 9A. Controls and Procedures		69
PART III
Item 10. Directors and Executive Officers of the Registrant		69
Item 11. Executive Compensation		69
Item 12. Security Ownership of Certain Beneficial Owners and Management		69
Item 13. Certain Relationships and Related Transactions		69
Item 14. Principal Accountant Fees and Services		69
PART IV
Item 15. Exhibits, Financial Statements Schedules and Reports on Form 8-K		70
SIGNATURES		72

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Reference in this Annual Report on Form 10-K to “Hub”, “we”, “us”, “our” and the “registrant” refer to Hub International Limited and its subsidiaries, unless otherwise expressly stated. We publish our consolidated financial statements in U.S. dollars. All reference in this report to “dollars” or “$” refer to U.S. dollars and all reference to “Canadian dollars” and “C$” refer to Canadian dollars, unless otherwise noted. Except as otherwise indicated, all financial statements and financial data contained in this Annual Report on From 10-K have been prepared in accordance with generally accepted accounting principles in Canada, or Canadian GAAP, which differs in certain respects from generally accepted accounting principles in the United States of America, or U.S. GAAP. Please see note 18 to our audited consolidated financial statements for a description of the material differences between Canadian GAAP and U.S. GAAP.

Information Concerning Forward-Looking Statements

This Form 10-K includes, and from time to time management may make, forward-looking statements which reflect our current views with respect to future events and financial performance. These forward-looking statements relate, among other things, to our plans and objectives for future operations. These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially from such statements. These uncertainties and other factors include, but are not limited to risks associated with:

• implementing our business strategies;

• identifying and consummating acquisitions;

• successfully integrating acquired businesses;

• attaining greater market share;

• developing and implementing effective information technology systems;

• recruiting and retaining qualified employees;

• fluctuations in the demand for insurance products;

• fluctuations in the premiums charged by insurance companies (with corresponding fluctuations in our premium-based revenue);

• any loss of services of key executive officers;

• industry consolidation;

• increased competition in the industry;

• the passage of new federal, state or provincial legislation subjecting our business to increased regulation in the jurisdictions in which we operate.

The words “believe,” “anticipate,” “project,” “expect,” “intend,” “will likely result” or “will continue” and similar expressions identify forward-looking statements. We caution readers not to place undue reliance on these forward-looking statements, which speak only as of their dates.

Except as otherwise required by federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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PART I

Item 1. Business

Overview

We are a leading North American insurance brokerage providing a broad array of property and casualty, life and health, employee benefits, investment and risk management products and services. We focus primarily on middle-market commercial accounts in the United States and Canada, which we serve through our approximately 2,500 employees in more than 150 locations, using a variety of retail and wholesale distribution channels. We define the middle market as those clients with 20 to 1,500 employees, which typically generate annual commissions and fees ranging from $2,500 to $250,000. Since our company was formed in 1998 through the merger of 11 Canadian insurance brokerages, we have acquired an additional 95 brokerages and have established a strong presence in the northeastern, midwestern and western United States and in the Canadian provinces of Ontario, Quebec and British Columbia. Through a combination of acquiring quality brokerages with proven track records and organic growth, we have grown our revenue from $38.7 million in 1998 to $286.4 million in 2003, of which 78% of the increase is attributable to acquisitions.

We operate through an organizational structure comprised of our head office, larger regional brokerages that we call “hub” brokerages and smaller brokerages that we call “fold-ins.” Our head office oversees the acquisition of hub brokerages, coordinates selling and marketing efforts, identifies cross-selling opportunities among our brokerages, negotiates significant contracts with insurers and handles certain general administrative functions. We have 10 hub brokerages, five operating in the United States and five in Canada. Each hub brokerage has a significant market presence in a geographic region of the United States or Canada. Each hub provides insurance brokerage services and is responsible for integrating the fold-in acquisitions in its region.

We have traditionally operated our hub brokerages in a decentralized manner so they may more effectively address their local market conditions. A hub brokerage is responsible not only for the development of its own business, but also the identification of fold-ins that can be acquired by and integrated into the operations of the hub brokerage. This process allows each hub brokerage an opportunity to strengthen its regional market presence by acquiring new or complementary products and services and management talent and improve profit margins through the reduction or elimination of redundant administrative functions, premises and systems. Our structure enables our hub brokerages to more effectively and quickly meet the changing needs of our clients in various markets, while benefiting from the operating efficiencies and leverage of a large brokerage. As we continue to grow, however, it is likely that added investment will be made to coordinate more functions from our head office to enhance the potential for cross-selling, international coordination, marketing efficiency, total expense management and financial controls.

Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports will be made available free of charge through the Investor Relations section of our Internet website (http://www.hubinternational.com) as soon as practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission.

Our products and services

We offer commercial and specialized insurance products and services to businesses, personal insurance products and services to individuals and program products to affinity groups and associations. We offer three categories of commercial products and services: property and casualty products, employee benefits and risk management services. We offer two categories of personal products and services: property and casualty products and life, health and financial products and services. Our program products involve the development, in collaboration with insurance companies, of baskets of insurance products for members of affinity groups or associations, such as lawyers’ associations, medical associations and other professional groups. Our specialized risk products cover diverse exposures such as environmental, professional liability and directors’ and officers’ liability.

Our business is compromised of two geographic segments, the United States and Canada. The mix of products and services we offer in the United States differs from those we offer in Canada. Our product mix in the United States is comprised of more commercial line products and services as compared with more personal line products and

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services in Canada. In the United States in 2003, 89% of our commission income was generated from the sale of commercial lines and 11% from personal lines. In Canada in 2003, 58% of our commission income was generated from the sale of commercial lines and 42% from personal lines.

The chart below lists a selection of our commercial and personal insurance products and services.

Commercial insurance

		Risk management
Property and casualty	Employee benefits	services
•   Business property •   Auto and trucking fleets •   Technology •   Intellectual property •   Natural disaster •   Workers’ compensation •   Liability •   Surety bonds •   Business income •   Accounts receivable •   Environmental risks	•   Group life and health •   Employment issues •   Human resources •   Retirement plans •   Contract review	•   Claims management •   Risk finance structuring •   Exposure evaluation •   Coverage analysis •   Contract review

Personal insurance

Property and casualty	Life, health and financial
•   Home •   Personal property •   Auto and recreational vehicles •   Travel accident and trip cancellation	•   Disability •   Life •   Investments •   Financial planning

Strategy

Our primary goals are to further develop our position as a leading North American insurance brokerage and to generate significant sustained shareholder value. We plan to achieve these objectives by executing the following strategies:

Focus on middle-market commercial accounts.We focus our sales efforts on middle-market companies. We believe that the insurance and risk management needs of these companies are underserved because many of the brokers that target them have limited capital resources and lack the breadth of products and services that we are able to offer due to our scale and strong insurer relationships. We primarily target commercial accounts because they generally generate higher profit margins than personal accounts. Commercial accounts also provide us with the opportunity to sell personal insurance products and employee benefits to the employees of those businesses.

Grow organically.We intend to increase profitability per customer and attract new clients by leveraging our existing infrastructure to sell a broad range of products and services through the efficient use of a variety of distribution channels, effectively and efficiently identify and target profitable client segments by employing technology to capitalize on our extensive customer databases, and maximize cross-selling opportunities among our brokerages.

Grow through selected acquisitions.The introduction of new brokerages through acquisitions is a fundamental component of our strategy. We have acquired an additional 95 brokerages since our formation in 1998. We acquire brokerages to grow our revenue, complement and supplement our existing products and services and add experienced management. In addition, acquisitions of larger brokerages allow us to further expand our hub platform and geographic footprint. We believe that we are well positioned to compete for quality brokerages and that our proven success in consolidating brokerages in the past will make us attractive to regional brokerages seeking to join with and share in the resources of a larger North American brokerage.

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Standardize procedures to increase operating efficiency and reduce costs. We strive to implement the best operating and sales practices of our brokerages across our company. We provide centralized marketing support to our brokers for many specialized risk programs and group home and auto plans and we integrate promotional programs, internet technology, procurement and risk management across our brokerage offices. Our brokerages share certain systems, such as accounting and payroll processing, which reduce redundancies and increase operating efficiencies. In addition, we continue to implement a comprehensive quality control program and a standardized approach to our sales and marketing efforts across our brokerages.

Recruit, train and retain qualified personnel.We have formalized our recruiting and training program to continue to build and sustain a sales and service team with a wide variety of experience and capabilities. We recruit directly from college campuses and other industries and provide new employees with effective training and attractive compensation packages. In addition, we are developing a company-wide sales culture by promoting the techniques and results of our most successful producers through regular newsletters, sales meetings, sales tracking, awards, recognition programs and training. We have implemented Hub Academy which is a formal program designed to provide educational and training opportunities to our employees who want to advance their professional skill sets. Programs such as the new producer training program are designed to groom selected candidates to be successful producers within our company. Participants spend several weeks learning about the insurance industry, our company, quality standards, products and services and leading sales techniques from our leading producers, members of management, representatives of insurance companies and other members of the industry.

Competitive advantages

We believe the following competitive advantages will enable us to achieve our objectives:

Decentralized hub approach.Our decentralized hub approach allows us to react to regional market conditions while still centrally managing the growth and profitability of our business with consistent standards. Our geographic diversity allows us to balance our revenue stream across markets and better insulate us from regional adverse developments. Our hub structure provides us with a ready platform, capable of reacting quickly to smaller brokerage acquisition opportunities, and to assimilate fold-ins once acquired.

Broad array of products and services offered through multiple distribution channels. We offer a broad array of products and services, which allows us to maintain and maximize existing client relationships and attract new clients. We offer these insurance products and services through four distribution channels: retail, wholesale property and casualty, wholesale life and financial and call-centers. Our diversity provides us not only with the flexibility to determine the most appropriate products and services but also, distribution channels to employ for particular market segments.

Benefits of scale.Our scale, relative to smaller brokerages, provides insurers with greater incentives to work with us. Enhanced insurer relationships often result in mutual cost savings, increased volume overrides and contingent commissions, favorable commission rates, collaborative marketing arrangements and product design, exclusive distribution rights for certain territories and products, and, in some cases, expanded authority to price and approve insurance policies on behalf of insurance companies. Our scale also makes us attractive to smaller brokerages as a potential acquiror.

Committed and experienced management.Most of the senior managers of our brokerages have over 20 years of experience in the industry, extensive contacts in the insurance brokerage industry, and participate in prominent industry associations, brokerage networks and insurance company brokerage councils. Most of management also has significant shareholdings in our company. A significant number of the shares held by management are subject to transfer restrictions, in some cases for up to ten years. In addition, designated key employees in each brokerage are rewarded for their contribution to our success through a bonus program that recognizes brokerage and over-all company performance in excess of specified targets. We believe that these strategies encourage loyalty and align the interests of management of our brokerages with our corporate goals and the interests of our shareholders, combining to create a powerful incentive to maximize financial results.

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Our operations

We were created in November 1998 when 11 Canadian brokerages merged to form Hub. Significant events that have occurred since our formation in the last five years include:

• January 1999 — Fairfax Financial Holdings Limited (Fairfax) purchased 5.4 million common shares of Hub for $34.2 million cash.

• January 1999 — We completed a financing whereby we issued a total of 2,838,080 common shares, on a private placement basis, at a price of $8.60 per common share or approximately $24.4 million in the aggregate. Fairfax purchased, through certain of its wholly-owned subsidiaries, 1,185,184 of the common shares.

• February 1999 — We completed a public offering in Canada of 865,624 common shares at a price of $8.60 per share for total proceeds of approximately $7.4 million and listed our common shares on the Toronto Stock Exchange (TSX).

• During 1999 — We acquired 44 brokerages in Canada and completed our first acquisition in the United States, Mack and Parker, Inc. (Mack and Parker).

• During 2000 — We acquired 18 brokerages in Canada and the United States including C.J. McCarthy Insurance Agency, Inc.

• During 2001 — We acquired 16 brokerages in Canada and the United States including J.P. Flanagan Corporation (Flanagan), Kaye Group Inc. (Kaye) and Burnham Insurance Group, Inc.

• June 2002 — We completed an initial public offering in the United States of 6,900,000 common shares, at a price of $14.00 per share. Total net proceeds from the offering after deducting total expenses were approximately $88.1 million.

• During 2002 — we acquired 8 brokerages in the United States and Canada including Hooper, Hayes and Associates, Inc. (Hooper Hayes) and Fifth Third Insurance Services, Inc., which we have renamed Hub International of Indiana Limited (Hub Indiana).

• During 2003 — we acquired 9 brokerages in the United States and in Canada with total annualized revenue of $8.0 million.

Our operations are currently conducted from principal offices located in Chicago, New York, Los Angeles, Boston, Battle Creek, MI, Toronto, Vancouver and Montreal.

Acquisition process

Our senior management is responsible for identifying and negotiating the acquisition of hub brokerages that are strategically suited to our growth strategy. Typically we are familiar with the owners and management of the acquisition target well before we initiate discussions. Most of the hub brokerages we acquire are owner operated. We perform extensive diligence on potential targets and we determine what the budget of the acquired brokerage, including payroll and other adjustments, will be prior to completing the acquisition.

We anticipate that we will selectively acquire more hub brokerages in geographic regions where we currently have a limited presence, most notably the southeastern and southwestern United States. There are many more brokerages in the United States that we would consider suitable hub brokerage acquisition candidates than in Canada due to the market size of the United States. Each new hub will be characterized by the following attributes:

• an experienced and talented management team prepared to make a long-term commitment to executing our strategic business plan;

• the ability to identify, acquire and seamlessly integrate smaller brokerages (fold-ins) in its region;

• specialization in certain products or services that may be beneficial to or complement our other brokerages; and

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• a demonstrated record of organic growth and profitability, operating at, or capable of achieving in the near term, minimum financial performance targets.

We expect that future acquisitions will be financed with available cash, the issuance of common shares, the proceeds of other financings, or a combination of the foregoing.

The retention of existing management at the hub brokerages we acquire is important to the successful integration and subsequent operation of acquired brokerages. We have in the past encouraged, and may continue in the future to encourage, existing management to stay with the acquired hub brokerage by using our common shares to pay a large portion of the acquisition price. The shares the owner/management receive are, in some cases, subject to transfer restrictions, for up to ten years. We also utilize our equity incentive plan to grant options to acquire our shares, restricted shares and restricted share units (in lieu of cash compensation or in consideration of non-competition covenants) which have vesting, exercise and transfer restrictions that are designed to encourage the long-term commitment of management to our company.

Distribution channels

We utilize retail, wholesale and call-center distribution channels, and have the ability to employ these distribution channels for specific market segments. Our brokerages use one of, or a combination of the following different distribution channels:

• Retail sales and service centers that target middle-market companies provide a broad range of property and casualty insurance, life and health insurance, risk management and financial services from traditional office locations leased by our brokerages in local communities.

• Retail call-centers provide sales and services by telephone to individuals or members of employee groups, associations, affinity groups and specific communities. We operate call-centers in Chicago, Saint John, New Brunswick and Chilliwack, British Columbia;

• Wholesale life and financial services centers, known as managing general agents, provide life and financial products and expertise to independent agents on a wholesale basis from our locations in Vancouver, Calgary, Montreal and Toronto; and

• Wholesale property and casualty insurance centers provide products, international risk solutions, captive management programs and specialty lines to independent brokers and corporations in North America and internationally from our locations in New York, Toronto, Montreal and Vancouver.

In addition, we are a member of the Worldwide Broker Network, a consortium of international brokerages which we can access to service clients resident in the United States and Canada who require insurance internationally.

Competition

The insurance brokerage industry is highly competitive. We face several sources of competition including other brokerages, insurance companies, banks and other financial services companies. Brokerage consolidators have been active in the market over several years. Consolidators, often publicly traded corporations, consolidate small to medium size independent brokerages with a view to strengthening their competitive position and increasing their market share. In addition to direct competition from the insurance companies, new sources of competition are emerging as banks in the United States accelerate their efforts to diversify their financial services to include insurance brokerage services (often through the acquisition of established insurance brokerages) and as the Canadian chartered banks lobby for greater flexibility to create and market insurance products.

We compete for clients in both the United States and in Canada on the basis of reputation, client service, program and product offerings and the ability to tailor our products and risk management services to the specific needs of a client. We believe that we are in a favorable competitive position in most of the meaningful aspects of our business because of our broad array of products and services, diversity of distribution channels, industry focus and expertise, and management experience.

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Like some of our competitors, we focus our sales efforts primarily on middle-market commercial accounts. We believe that the most likely source of competition for us in the United States will be other brokerages who pursue an acquisition or consolidation strategy similar to ours. We believe that our primary competitors in Canada are local retail brokers.

Government regulation

Licenses

In every state, province and territory in which we do business, the relevant brokerage is required to be licensed or to have received regulatory approval to conduct business. In addition to licensing requirements, most jurisdictions require individuals who engage in brokerage and certain insurance service activities to be licensed personally.

Our operations depend on the validity of and continued good standing under the licenses and approvals pursuant to which we operate. Licensing laws and regulations vary from jurisdiction to jurisdiction and are always subject to amendment or interpretation by regulatory authorities. Such authorities generally have the discretion to grant, renew and revoke licenses and approvals.

Privacy

The management and dissemination of information is critical to our business. We gather information from our clients to assess and address their insurance needs. We share information both internally, among our employees, and, where appropriate and permitted, between our brokerages, as well as externally, with insurers. We believe we have taken appropriate steps to safeguard our clients’ information. In both the United States and Canada comprehensive privacy laws have been introduced to protect the privacy of individuals from the undisclosed or non-consensual sharing of sensitive information for commercial purposes. As the gathering and use of information is such an integral component of our business, we must always be alert for changes in the information regulatory environment.

Employees

As of December 31, 2003, we employed 2,472 persons on a full-time basis, 2,022 of whom were employed in sales and customer service and 450 of whom were employed in corporate, finance and administration. None of our employees are represented by a labor union and we have never experienced a work stoppage. We believe our relationship with our employees is good.

We have generally entered into agreements containing confidentiality and non-disclosure provisions with our employees and consultants who have access to our proprietary information. In addition, each member of senior management of our brokerages is subject to an employment agreement that sets out the terms of his or her employment. These agreements typically include non-solicitation and non-competition covenants, which continue for up to two years after the cessation of employment.

Risks related to our business

We may be unsuccessful in identifying and acquiring suitable acquisition candidates, which could impede our growth and ability to remain competitive in our industry.

Our strategic plan includes the regular and systematic evaluation and acquisition of insurance brokerages in new and existing markets. Since our formation in 1998, approximately 78% of our revenue growth has been attributable to acquisitions. However, we may not successfully identify suitable acquisition candidates. Prospective acquisition candidates may not become available or we may not be able to complete an acquisition once negotiations have commenced. We compete for acquisition and expansion opportunities with entities that have substantially greater resources than we do and these entities may be able to outbid us for these acquisition targets. If we fail to execute our acquisition strategy, our revenue growth is likely to suffer and we may be unable to remain competitive.

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Our continued growth is partly based on our ability to successfully integrate acquired brokerages and our failure to do so may have an adverse effect on our revenue and expenses.

We may be unable to successfully integrate brokerages that we may acquire in the future. The integration of an acquisition involves a number of factors that may affect our operations. These factors include:

• diversion of management’s attention;

• difficulties in the integration of acquired operations and retention of personnel;

• entry into unfamiliar markets;

• unanticipated problems or legal liabilities; and

• tax and accounting issues.

A failure to integrate acquired brokerages may be disruptive to our operations and negatively impact our revenue or increase our expenses.

Insurance brokerages that we have acquired may have liabilities that we are not aware of and may not be as profitable as we expect them to be.

Since our formation in November 1998 through the merger of 11 insurance brokerages, we have acquired an additional 95 brokerages. Although we conduct due diligence in respect of the business and operations of each of the brokerages we acquire, we may not have identified all material facts concerning these brokerages. For example, on one occasion we discovered a brokerage’s liability for unaccrued corporate taxes only after we had completed the acquisition of the brokerage. Unanticipated events or liabilities relating to these brokerages could have a material adverse effect on our financial condition. Furthermore, once we have integrated an acquired brokerage, it may not achieve levels of revenue, profitability, or productivity comparable to our existing locations, or otherwise perform as expected. Our failure to integrate one or more acquired brokerages so that they achieve our performance goals may have a material adverse effect on our results of operations and financial condition.

If we fail to obtain additional financing for acquisitions, we may be unable to expand our business.

Our acquisition strategy may require us to seek additional financing. If we are unable to obtain sufficient financing on satisfactory terms and conditions, we may not be able to maintain or increase our market share or expand our business through acquisitions. Our ability to obtain additional financing will depend upon a number of factors, many of which are beyond our control. We may not be able to obtain additional satisfactory financing because we already have debt outstanding and because we may not have sufficient cash flow to service or repay our existing or additional debt. For example, as of December 31, 2003, we had $113.8 million of total debt and our two credit facilities contain covenants that, among other things, require us to maintain certain financial ratios and restrict our ability to incur additional debt.

We cannot accurately forecast our commission revenue because our commissions depend on premium rates charged by insurance companies, which historically have varied and are difficult to predict. Any declines in premiums may adversely impact our profitability.

In 2003, we derived approximately 91% of our revenue from commissions paid by insurance companies on the sale of their insurance products to our clients. Our revenue from commissions fluctuates with premiums charged by insurers, as commissions typically are determined as a percentage of premiums. When premiums decline, we experience downward pressure on our revenue and earnings. Historically, property and casualty premiums have been cyclical in nature and have varied widely based on market conditions. Significant reductions in premium rates occurred during the years 1988 through 2000 as a result of expanded underwriting capacity of property and casualty insurance companies and increased competition. In some cases, property and casualty insurance companies lowered commission rates. The years 2001 through 2003 saw premium rates increase. Although we cannot predict changes in premium pricing, we did begin to see some reductions in pricing in the latter part of 2003 in the United States. Canadian rate trends have trailed those of the United States, leading to expectations that Canadian premium rates

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will continue to be firm for much of 2004, with some softening as the year progresses. Because we cannot determine the timing and extent of premium pricing changes, we cannot accurately forecast our commission revenue, including whether it will significantly decline. If premiums decline or commission rates are reduced, our revenue, earnings and cash flow could decline. In addition, our budgets for future acquisitions, capital expenditures, dividend payments, loan repayments and other expenditures may have to be adjusted to account for unexpected changes in revenue.

Insurance company contingent commissions and volume overrides are less predictable than normal commissions, which impairs our ability to forecast the amount of such revenue that we will receive and may negatively impact our operating results.

We derive a portion of our revenue from contingent commissions and volume overrides. The aggregate of these sources of revenue generally has accounted for approximately 6% of our total revenue. Contingent commissions may be paid by an insurance company based on the profit it makes on the overall volume of business that we place with it. Volume overrides and contingent commissions are typically calculated in the first or second quarter of the following year by the insurance companies and are paid once calculated. As a result of recent developments in the property and casualty insurance industry, including changes in underwriting criteria due in part to the higher numbers and dollar value of claims as compared to the premiums collected by insurance companies, we cannot predict the payment of this performance-based revenue as accurately as we have been able to in the past. Further, we have no control over the process by which insurance companies estimate their own loss reserves, which affects our ability to forecast contingent commissions. Because these contingent commissions affect our revenue, any decrease in their payment to us could adversely affect our results of operations. Recently, legal proceedings challenging the appropriateness of revenue sharing arrangements between insurance companies and brokerages, including contingent profit and volume override arrangements, have been commenced against certain insurance brokerages. These proceedings allege that such revenue sharing arrangements conflict with a broker’s duty to its clients. While we have not been named as a defendant in any such proceeding, and disagree with the underlying premise that these revenue sharing arrangements create a conflict of interest, we could be the subject of a similar action in the future. A finding that such arrangements conflict with a broker’s duty to its clients could have a material adverse affect on our revenue and profitability.

Proposed tort reform legislation in the United States, if enacted, could decrease demand for liability insurance, thereby reducing our commission revenue.

Legislation concerning tort reform is currently being considered in the United States Congress and in several states. Among the provisions being considered for inclusion in such legislation are limitations on damage awards, including punitive damages, and various restrictions applicable to class action lawsuits, including lawsuits asserting professional liability of the kind for which insurance is offered under certain policies we sell. Enactment of these or similar provisions by Congress, or by states or countries in which we sell insurance, could result in a reduction in the demand for liability insurance policies or a decrease in policy limits of such policies sold, thereby reducing our commission revenue.

A substantial portion of our total assets are represented by goodwill and other intangible assets as a result of our acquisitions and under new accounting standards, we may be required to write down the value of our goodwill and other intangible assets.

When we acquire a brokerage, virtually the entire purchase price for the acquisition is allocated to goodwill and other identifiable intangible assets. The amount of purchase price allocated to goodwill is determined by the excess of the purchase price over the net identifiable assets paid by us to acquire the brokerage.

On July 1, 2001, we adopted the Canadian Institute of Chartered Accountants (CICA) Accounting Standards Board Handbook Section 1581, “Business Combinations”. These new rules require that all business combinations after

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June 30, 2001 be accounted for in accordance with the purchase method of accounting and expand the definition of other identifiable intangible assets acquired in a business combination using the purchase method.

On January 1, 2002, we adopted CICA’s Section 3062, “Goodwill and Other Intangible Assets”. For all business combinations accounted for using the purchase method prior to June 30, 2001, Section 3062 eliminates the amortization of goodwill, requires annual impairment testing of goodwill and introduces the concept of definite life and indefinite life intangible assets. Indefinite life intangible assets, similar to goodwill, will no longer be amortized and will be tested at least annually for impairment. A deterioration in our operating results may adversely affect the carrying value of our goodwill and other indefinite life intangible assets. The loss of a significant client at one of our brokerages could result in an impairment of goodwill associated with such brokerage, which would cause us to take an impairment to goodwill. Such an impairment would adversely affect our earnings.

The loss of members of our senior management or a significant number of our brokers could negatively affect our financial plans, marketing and other objectives.

The loss of or failure to attract key personnel could significantly impede our financial plans, growth, marketing and other objectives. Our success depends to a substantial extent not only on the ability and experience of our senior management but also on the individual brokers and teams that service our clients and maintain client relationships. In the past, we have experienced short-term disruptions to certain brokerage operations due to the early retirement of senior members of management at those brokerages. Our operations are not generally dependent on any one individual; however, the loss of Martin Hughes, our Chairman and Chief Executive Officer could negatively impact our acquisition strategy in the United States due to his significant relationships and expertise in the insurance industry.

The insurance brokerage industry has in the past experienced intense competition for the services of leading individual brokers and brokerage teams. We believe that our future success will depend in large part on our ability to attract and retain additional highly skilled and qualified personnel and to expand, train and manage our employee base. We may not be successful in doing so because the competition for qualified personnel in our industry is intense. If we fail to recruit and retain top producers, our organic growth may be adversely affected.

Competition in our industry is intense, and if we are unable to compete effectively, we may lose market share and our business may be materially adversely affected.

The insurance brokerage business is highly competitive and we actively compete with other insurance brokerages for customers and insurance company markets, many of which have existing relationships with insurance companies or have a significant presence in niche insurance markets that may give them an advantage over us. Because relationships between insurance brokers and insurance companies or clients are often local or regional in nature, this potential competitive disadvantage is particularly pronounced. See “Business — Competition” for a further discussion of the level of competition in our industry.

We face competition in all markets in which we operate, based on product breadth, innovation, quality of service and price. We compete with a number of brokerages in the United States, who may have greater resources than we do, as well as with numerous Internet-based, specialist and regional firms in the United States and Canada. If we are unable to compete effectively against our competitors, we will suffer a loss of market share, decreased revenue and reduced operating margins.

In addition, regulatory changes in the financial services industry in the United States and Canada have permitted banks, securities firms and insurance companies to affiliate, causing rapid consolidation in the insurance industry. Some insurance companies are engaged in the direct sale of insurance, primarily to individuals, and do not pay commissions to agents and brokers on policies they sell directly. Increasing competition from insurance companies and from within the financial services industry, generally, could have a negative effect on our operations.

  12   HUB INTERNATIONAL LIMITED ANNUAL REPORT December 31, 2003

We do business with certain subsidiaries of our largest shareholder and if a conflict of interest were to arise it may not be resolved in our favor and could adversely affect our revenue.

As of December 31, 2003, Fairfax Financial Holdings Limited owned or controlled 26% of our common shares, 32% if Fairfax converted our convertible subordinated debentures it holds. We do business with certain subsidiaries of Fairfax which represented approximately 10% of our revenue in 2003. We expect that this percentage will decrease as we complete more acquisitions in the United States. If a conflict of interest arose between us and Fairfax or one of its subsidiaries, we cannot assure you that this conflict would be resolved in a manner that would favor us. In addition, if Fairfax were to sell our common shares that it owns, it may no longer be as interested in continuing to do business with us which could have a material adverse effect on our revenue and expenses and such a sale by Fairfax could also impact our share price.

We depend on our information processing systems. Interruption or loss of our information processing systems could have a material adverse effect on our business.

Our ability to provide administrative services depends on our capacity to store, retrieve, process and manage significant databases and expand and upgrade periodically our information processing capabilities. Interruption or loss of our information processing capabilities through loss of stored data, breakdown or malfunctioning of computer equipment and software systems, telecommunications failure, or damage caused by fire, tornadoes, lightning, electrical power outage or other disruption could have a material adverse effect on our business, financial condition and results of operations. Although we have disaster recovery procedures in place for all our hub brokerages and insurance to protect against such contingencies, such procedures may not be effective and any insurance or recovery procedures may not continue to be available at reasonable prices and may not address all such losses or compensate us for the possible loss of clients occurring during any period that we are unable to provide services.

Privacy legislation may impede our ability to utilize our customer database as a means to generate new sales.

We intend to utilize our extensive customer databases for marketing and sales purposes, which we believe will enhance our ability to meet our organic growth targets. However, new privacy legislation, such as the Gramm-Leach-Bliley Act and the Health Insurance Portability and Accountability Act of 1996 in the United States and the Personal Information Protection and Electronic Documents Act (PIPEDA) in Canada, as well as other regulatory changes, may restrict our ability to utilize personal information that we have collected in our normal course of operations to generate new sales. If we become subject to new restrictions, or other regulatory restrictions, which we are not aware of, our ability to grow our business may be adversely affected.

The security of the databases that contain our customers’ personal information may be breached which could subject us to litigation or adverse publicity.

We depend on computer systems to store information about our customers, some of which is private. Database privacy, identity theft and related computer and internet issues are matters of growing public concern. We have installed privacy protection systems and devices on our network in an attempt to prevent unauthorized access to information in our database. However, our technology may fail to adequately secure the private information we maintain in our databases and protect it from theft or inadvertent leakage. In such circumstances, we may be held liable to our customers, which could result in litigation or adverse publicity that could have a material adverse effect on our business.

Our corporate structure and strategy of operating through decentralized brokerages may make it more difficult for us to become aware of and respond to adverse operating or financial developments at our brokerages.

We depend on timely and accurate reporting of business conditions and financial results from our brokerages to affect our business plan and determine and report our operating results. We receive end of month reports from each of our brokerages regarding their financial condition and operating results. If an adverse business or financial

ANNUAL REPORT December 31, 2003 HUB INTERNATIONAL LIMITED    13 

development occurs at one or more of our brokerages near the beginning of a month, we may not become aware of the occurrence for several weeks which could make it more difficult for us to effectively respond to that development. In addition, if one of our brokerages was to report inaccurate financial information, we might not learn of these inaccuracies for several weeks, if at all, which could adversely affect our ability to determine and report our financial results. For example, on occasion, inconsistent accounting treatment at a brokerage has not been detected until preparation of our quarterly financial statements. We have implemented enterprise reporting software that enables us to extract financial and operating data from our brokerages electronically; however, in the event of a technical or other failure we may be unable to use this software effectively to compile our financial data or to prevent inconsistent reporting of financial information.

Our profitability and liquidity may be materially adversely affected by errors and omissions.

We have extensive operations and are subject to claims and litigation in the ordinary course of business resulting from alleged errors and omissions. Errors and omissions claims can involve significant defense costs and may result in large damage awards against us. Errors and omissions could include, for example, our employees or sub-agents failing, whether negligently or intentionally, to place coverage or to notify insurance companies of claims on behalf of clients, to provide insurance companies with complete and accurate information relating to the risks being insured or to appropriately apply funds that we hold for our clients on a fiduciary basis. It is not always possible to prevent and detect errors and omissions and the precautions we take may not be effective in all cases.

The amount of coverage limits and related deductible amounts of our errors and omissions insurance policies are established annually based upon our assessment of our errors and omissions exposure, loss experience and the availability and pricing of coverage within the marketplace. While we endeavor to purchase coverage that is appropriate to our assessment of our risk, we are unable to predict with certainty the frequency, nature or magnitude of claims for direct or consequential damages.

Our profitability and liquidity may be adversely affected if in the future our insurance coverage proves to be inadequate or unavailable or there is an increase in liabilities for which we self-insure. In addition, errors and omissions claims may harm our reputation or divert management resources away from operating our business.

If we fail to comply with regulatory requirements for insurance brokerages, we may not be able to conduct our business.

Our business is subject to legal requirements and governmental regulatory supervision in the jurisdictions in which we operate. These requirements are designed to protect our clients by establishing minimum standards of conduct and practice, particularly regarding the provision of advice and product information as well as financial criteria.

Our activities in the United States and Canada are subject to regulation and supervision by state and provincial authorities. Although the scope of regulation and form of supervision by state and provincial authorities may vary from jurisdiction to jurisdiction, insurance laws in the United States and Canada are often complex and generally grant broad discretion to supervisory authorities in adopting regulations and supervising regulated activities. This supervision generally includes the licensing of insurance brokers and agents and the regulation of the handling and investment of client funds held in a fiduciary capacity. Our ability to conduct our business in the jurisdictions in which we currently operate depends on our compliance with the rules and regulations promulgated from time to time by the regulatory authorities in each of these jurisdictions.

Our clients have the right to file complaints with the regulators about our services, and the regulators may investigate and require us to address these complaints. Our failure to satisfy the regulators that we are in compliance with their requirements or the legal requirements governing our activities can result in disciplinary action, fines, reputational damage and financial harm.

In addition, changes in legislation or regulations and actions by regulators, including changes in administration and enforcement policies, could from time to time require operational improvements or modifications at various locations which could result in higher costs or hinder our ability to operate our business. See “Business — Government regulation.”

  14   HUB INTERNATIONAL LIMITED ANNUAL REPORT December 31, 2003

Risks related to our common shares

The price of our common shares may fluctuate substantially, which could negatively affect the holders of our common shares.

The price of our common shares may fluctuate substantially due to the following factors: (1) fluctuations in the price of the shares of the small number of public companies in the insurance brokerage business, (2) announcements of acquisitions as part of our growth strategy, (3) additions or departures of key personnel, (4) announcements of legal proceedings or regulatory matters and (5) the general volatility in the stock market. The market price of our common shares could also fluctuate substantially if we fail to meet or exceed securities analysts’ expectations of our financial results or if there is a change in financial estimates or securities analysts’ recommendations. From the beginning of 2002 to March 3, 2004, the price of our common shares on the TSX has ranged from a low of C$15.50 to a high of C$29.00, and on the NYSE has ranged from a low of $11.45 to a high of $17.90.

In addition, the stock market has experienced volatility that has affected the market prices of equity securities of many companies, and that has often been unrelated to the operating performance of these companies. A number of other factors, many of which are beyond our control, could also cause the market price of our common shares to fluctuate substantially.

Significant fluctuation in the market price of our common shares could result in securities class action claims against us.

Significant price and value fluctuations have occurred with respect to the securities of insurance and insurance-related companies. Our common share price is likely to be volatile in the future. In the past, following periods of downward volatility in the market price of a company’s securities, class action litigation has often been pursued against the respective company. If similar litigation was pursued against us, it could result in substantial costs and a diversion of our management’s attention and resources.

Our largest shareholder may substantially influence certain actions requiring shareholders approval.

As of December 31, 2003, Fairfax owned or controlled 26% of our common shares. Fairfax also owns or controls $35 million of subordinated convertible notes, which it can convert at any time into our common shares at C$17.00 per share. If Fairfax converts the notes it would hold 32% of our common shares. Under our by-laws and articles of incorporation, Fairfax has the ability to substantially influence certain actions requiring shareholder approval, including:

• electing members of our board of directors;

• adopting amendments to our articles and by-laws; and

• approving a merger or consolidation, liquidation or sale of all or substantially all of our assets.

Fairfax may have different interests than you have and therefore may make decisions that are adverse to your interests.

We are incorporated in Ontario, Canada, and, as a result, it may not be possible for shareholders to enforce civil liability provisions of the securities laws of the United States.

We are organized under the laws of Ontario, Canada and some of our assets are located outside the United States. As a result, it may not be possible for the holders of our common shares to enforce against us in United States courts judgments based on the civil liability provisions of the securities laws of the United States. In addition, there is doubt as to whether the courts of Canada would recognize or enforce judgments of United States courts obtained against us or our directors or officers based on the civil liability provisions of the securities laws of the United States or any state or hear actions brought in Canada against us or those persons based on those laws.

ANNUAL REPORT December 31, 2003 HUB INTERNATIONAL LIMITED    15 

Item 2. Properties

We maintain our corporate headquarters in Chicago, Illinois at premises that we sublet from Mack and Parker, one of our subsidiaries. This facility, totaling approximately 3,500 square feet, contains corporate, finance, administration, sales and customer support functions. The lease on the premises expires on October 1, 2011. In addition, our brokerages lease office space in the locations in which they operate, none of which is material. In total, we hold 158 leases covering approximately 720,000 square feet with a total annual base rent for all of these locations of approximately $10 million.

We believe that our facilities are well maintained and in good condition and are adequate for our current needs. We expect that suitable additional space will be available as required.

Item 3. Legal Proceedings

In the normal course of business, we are involved in various claims and legal proceedings relating to insurance placed by us and other contractual matters. Our management does not believe that any such pending or threatened proceedings will have a material adverse effect on our consolidated financial position or future results of operations.

Item 4.  Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders during the fourth quarter ended December 31, 2003.

  16   HUB INTERNATIONAL LIMITED ANNUAL REPORT December 31, 2003

PART II

Item 5.  Market for Registrant’s Common Equity and Related Shareholder Matters

In connection with our initial public offering in the United States, our common shares became listed on the New York Stock Exchange (NYSE) on June 18, 2002 under the symbol HBG. Our common shares are also listed and posted for trading on the Toronto Stock Exchange (TSX) in Canada under the symbol HBG. The following table sets forth the high and low sales prices per share for our common shares on the NYSE and TSX:

		NYSE				TSX
										Cash
		High		Low		High		Low		Dividends
2002
	First Quarter						C$21.00		C$15.50		C$0.07
	Second Quarter		$16.80		$13.46		C$25.75		C$20.00		C$0.07
	Third Quarter		$16.60		$12.90		C$25.25		C$20.25		C$0.07
	Fourth Quarter		$18.60		$11.45		C$29.00		C$17.71		C$0.07
2003
	First Quarter		$15.05		$11.55		C$23.12		C$17.34		$0.05
	Second Quarter		$17.18		$13.05		C$23.27		C$19.00		$0.05
	Third Quarter		$19.97		$15.50		C$27.50		C$20.95		$0.05
	Fourth Quarter		$17.05		$15.00		C$22.99		C$19.40		$0.05
2004
	First Quarter (through March 3, 2004)		$17.90		$15.94		C$23.83		C$20.42		$0.05

On December 31 2003, the closing price of our common shares on the NYSE was $16.76 and on the TSX the closing sale price was C$21.90. The exchange rate in effect at December 31, 2003 was C$1.00 per $0.7738. As of March 3, 2004, there were 30,299,170 of our common shares issued and outstanding. As of the close of business March 3, 2004, we had approximately 280 holders of record of our common shares.

We have no formal dividend policy other than the board of directors considers the payment of dividends as quarterly financial information becomes available. In the future, dividends will be paid at the discretion of our board of directors depending on our financial position and capital requirements, general business conditions, contractual restrictions and other factors. Dividends paid after December 31, 2002 have been, and dividends, if any, that may be declared in the future, will be declared in U.S. dollars instead of Canadian dollars.

Item 6.  Selected Financial Data

We were formed in November 1998 through the merger of 11 independent insurance brokerages into a new company. The merger was accounted for using the pooling-of-interests method.

Our results for the five year period ended December 31, 2003 reflect the acquisition of brokerages that occurred in each respective period. These acquisitions were accounted for using the purchase method. Thus, results of acquisitions are only included from the date of acquisition forward. Accordingly, the results in each period are not directly comparable.

Our historical consolidated financial statements are prepared in accordance with Canadian GAAP, which differs in certain respects from U.S. GAAP. For a discussion of the principal differences between Canadian GAAP and U.S. GAAP as it relates to us, see note 18 to our audited consolidated financial statements included elsewhere in this Form 10-K.

ANNUAL REPORT December 31, 2003 HUB INTERNATIONAL LIMITED    17 

			Year Ended December 31,
(in thousands of U.S. dollars,
except per share amounts)(1)			2003			2002			2001			2000		1999
Consolidated statement of earnings data:
Canadian GAAP
Revenue:
	Commission income		$	259,461		$	200,976		$	143,063		$	86,410	$	47,964
	Contingent commissions and volume overrides			18,530			11,464			5,899			4,909		2,824
	Other			8,368			7,520			5,031			3,921		3,309
				286,359			219,960			153,993			95,240		54,097
Expenses:
	Compensation			156,320			118,667			88,015			54,701		29,519
	Selling, occupancy and administration			56,606			44,932			35,276			21,778		13,235
	Depreciation			6,244			5,492			3,940			1,885		1,275
	Interest expense			5,191			7,317			7,447			1,981		632
	Intangible asset amortization			3,208			1,671			4,940			3,260		1,626
	(Gain) loss on disposal of property, equipment and other assets			(202	)		(2,679	)		(173	)		127		14
	(Gain) on put option liability			(160	)		(186	)		(719	)		—		—
	Non-cash stock based compensation			4,801			1,089			—			—		—
	Proceeds from life insurance			(1,000	)		—			—			—		—
				231,008			176,303			138,726			83,732		46,301
Net earnings before income taxes				55,351			43,657			15,267			11,508		7,796
Provision for income tax expense				18,842			14,256			5,262			5,370		4,052
Net earnings(2)			$	36,509		$	29,401		$	10,005		$	6,138	$	3,744
Earnings per share(2)
	Basic			$1.22			$1.27			$0.53			$0.34		$0.22
	Diluted			$1.14			$1.06			$0.50			$0.34		$0.22
Weighted average shares outstanding:
	Basic			29,967			23,181			19,012			18,327		16,941
	Diluted			33,767			30,199			20,105			18,327		16,941
Dividends declared per share(3)				$0.20			$0.18			$0.18			$0.13		$—
U.S. GAAP
	Net earnings (Canadian GAAP)		$	36,509		$	29,401		$	10,005		$	6,138	$	3,744
		Adjustment to investment held for sale		—			(2,236	)		520			—		—
		Cumulative effect of change in accounting policy for put options		335			—			—			—		—
		Adjustment to put option liability		(409	)		(814	)		(811	)		—		—
		Change in reporting currency		—			—			144			405		233
	Net earnings (U.S. GAAP)(4)		$	36,435		$	26,351		$	9,858		$	6,543	$	3,977
Net earnings per share (U.S. GAAP)(4)
	Basic			$1.22			$1.14			$0.52			$0.36		$0.23
	Diluted			$1.14			$0.96			$0.49			$0.36		$0.23

(1) Effective October 1, 2001, we adopted the U.S. dollar as our reporting currency. Our financial results for all periods prior to October 1, 2001 have been restated from Canadian dollars to U.S. dollars at the exchange rate in effect at September 30, 2001 of C$1.00 = $0.6338.

  18   HUB INTERNATIONAL LIMITED ANNUAL REPORT December 31, 2003

(2) As discussed in note 2, “Summary of significant accounting policies,” of the notes to the audited consolidated financial statements, we adopted Canadian Institute of Chartered Accountants (CICA) Section 3062 on January 1, 2002. Upon adoption of CICA Section 3062, goodwill is no longer amortized. The following table illustrates the effect that CICA Section 3062 would have had on net earnings and per share information under Canadian GAAP for the years ended December 31, 2003, 2002, 2001, 2000 and 1999 had goodwill not been amortized:

	Year Ended December 31,
(in thousands of U.S. dollars, except
per share amounts)	2003		2002		2001		2000		1999
Reported net earnings — Canadian GAAP	$	36,509	$	29,401	$	10,005	$	6,138	$	3,744
Add back: Goodwill amortization		—		—		3,996		2,820		1,490
Net earnings adjusted for goodwill	$	36,509	$	29,401	$	14,001	$	8,958	$	5,234
Basic EPS — Reported	$	1.22	$	1.27	$	0.53	$	0.34	$	0.22
Basic EPS — Adjusted for goodwill	$	1.22	$	1.27	$	0.74	$	0.49	$	0.31
Diluted EPS — Reported	$	1.14	$	1.06	$	0.50	$	0.34	$	0.22
Diluted EPS — Adjusted for goodwill	$	1.14	$	1.06	$	0.70	$	0.49	$	0.31

(3)

We commenced payment of dividends in the second quarter of 2000.

(4)

We adopted Financial Accounting Standards Board’s Statement of Financial Accounting Standards No. 142 (SFAS No. 142) on January 1, 2002. Upon adoption of SFAS No. 142 goodwill is no longer amortized. The following table illustrates the effect that SFAS No. 142 would have had on net earnings and per share information under U.S. GAAP for the years ended December 31, 2003, 2002, 2001, 2000 and 1999 had goodwill not been amortized:

	Year Ended December 31,
(in thousands of U.S. dollars, except
per share amounts)	2003		2002		2001		2000		1999
Reported net earnings — U.S. GAAP	$	36,435	$	26,351	$	9,858	$	6,543	$	3,977
Add back: Goodwill amortization		—		—		4,065		2,988		1,583
Net earnings adjusted for goodwill	$	36,435	$	26,351	$	13,923	$	9,531	$	5,560
Basic EPS — Reported	$	1.22	$	1.14	$	0.52	$	0.36	$	0.23
Basic EPS — Adjusted for goodwill	$	1.22	$	1.14	$	0.73	$	0.52	$	0.33
Diluted EPS — Reported	$	1.14	$	0.96	$	0.49	$	0.36	$	0.23
Diluted EPS — Adjusted for goodwill	$	1.14	$	0.96	$	0.69	$	0.52	$	0.33

ANNUAL REPORT December 31, 2003 HUB INTERNATIONAL LIMITED    19 

				As of December 31
(in thousands of U.S. dollars)(1)				2003			2003			2002			2000		1999
Consolidated balance sheet data
Total assets				$	700,603		$	596,876		$	502,296		$	206,157	$	171,202
Total debt(2)				$	113,799		$	107,038		$	196,952		$	34,665	$	20,565
Total shareholders’ equity				$	342,790		$	284,274		$	135,271		$	112,212	$	105,462
Reconciliation to U.S. GAAP:
	Total shareholders’ equity
	(Canadian GAAP)			$	342,790		$	284,274		$	135,271		$	112,212	$	105,462
		Adjustment to investment held for sale			(1,716	)		(1,716	)		520			—		—
		Accumulated other comprehensive income:
			Unrealized gains (losses), net of tax of $(56) — 2003, $85 — 2002, $(122) — 2000, $(26) — 1999		90			(83	)		(140	)		198		42
			Cumulative translation account		—			496			—			5,811		9,836
			Adjustment to put option liability		—			(1,702	)		(4,898	)		—		—
			Executive share purchase plan loan		—			(1,912	)		(2,142	)		—		—
Total shareholders’ equity (U.S. GAAP)				$	341,164		$	279,357		$	128,611		$	118,221	$	115,340

(1)	Effective October 1, 2001, we adopted the U.S. dollar as our reporting currency. Our financial results for all periods prior to October 1, 2001 have been restated from Canadian dollars to U.S. dollars using the exchange rate in effect at September 30, 2001 of C$1.00 = $0.6338.
(2)	Includes long-term debt and capital leases (including current portion), bank debt and subordinated convertible notes.

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with our consolidated financial statements and accompanying notes included elsewhere in this report. Certain information contained in “Management’s discussion and analysis of financial condition and results of operations” are forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements because of various factors, including those discussed below and elsewhere in this Form 10-K, particularly under the heading “Risk Factors”. Reference to “Hub”, “we”, “us”, “our” and the “registrant” refer to Hub International Limited and its subsidiaries, unless otherwise expressly stated. Unless otherwise indicated, all dollar amounts are expressed in, and the term “dollars” and the symbol “$” refer to, U.S. dollars. The term “Canadian dollars” and the symbol “C$” refer to Canadian dollars. Our financial statements are prepared in accordance with Canadian generally accepted accounting principles (Canadian GAAP). These principles differ in certain respects from United States generally accepted accounting principles (U.S. GAAP) and to the extent that they effect us are described in Note 18 to our audited consolidated financial statements.

Overview

Hub is a leading North American insurance brokerage that has grown rapidly since its formation in 1998 through mergers, acquisitions and organic growth. We provide a broad array of property and casualty, life and health, employee benefits, investment and risk management products and services through offices located in the United States and Canada. We are pursuing a growth strategy that includes expansion of our geographic footprint across the United States and deeper penetration of the insurance brokerage market in both the United States and Canada. Both acquisitions and internal growth are core components of our strategic plan for revenue expansion.

We anticipate that increases in revenue, higher revenue per employee, expense control and more advantageous commission arrangements with insurance firms will be instrumental in margin expansion efforts.

  20   HUB INTERNATIONAL LIMITED ANNUAL REPORT December 31, 2003

As of December 31, 2003, our operations included 10 regional “hub” brokerages — five in the United States and five in Canada — and more than 150 offices staffed by approximately 2,500 people. Our strategic plan calls for the addition of approximately 10 additional U.S. hubs to extend our geographic footprint. Brokerages large enough to be considered hubs will generally have annual revenue in excess of $10 million. In addition to larger, “hub” acquisitions by the parent corporation, each regional hub is tasked with pursuing smaller, fold-in acquisitions that either expand its geographic penetration or add new specialization or expertise to the regional operation.

We generally acquire larger, “hub” brokerages, for a combination of cash and stock. Although there are variations in the purchase terms for each hub, our goal is to pay 30% - 70% of the “hub” purchase price in our common stock, while setting escrow periods of up to 10 years for the sellers to hold these shares. We believe the use of escrowed stock in major acquisitions creates increased alignment of interests between senior managers and the public shareholders of the corporation. We have paid all cash for the acquisition of certain brokerages, and may pay an all cash purchase price for brokerages in the future. As of December 31, 2003, senior managers of the company and its hubs owned approximately 4,129,000 shares, or 12.5% of shares outstanding, while all employees as a group held approximately 9,176,000 shares, or 27.8% of total shares outstanding.

During the three years ended December 31, 2003, we acquired 24 brokerages in the United States and another 9 brokerages in Canada, adding a combined $156.5 million to our revenue as of the dates of acquisition. Of these acquisitions, 4 were regional hubs, all based in the United States. United States revenue has grown to 62% of our total in 2003 from 21% in 2000, reflecting primarily acquisition growth but also organic growth and our strategic plan to use acquisitions to expand across the United States. Organic growth is similar to thesame-store-sales calculation used by retailers. It includes revenue growth from units included in our financial statements for at least 12 months. Because we apply the purchase method of accounting for acquisitions, acquired brokerages’ financial results are included only from the date of acquisition.

We acquired brokerages with aggregate annual revenue of $8.1 million in 2003, down from approximately $59.6 million of acquired revenue in 2002. The slower pace of acquisitions in 2003 resulted from a number of factors, including competition for brokerages by banks and other buyers willing to acquire insurance brokers at higher valuations than we and most industry peers have been willing to pay.

Our management believes pricing discipline is a key to successful acquisition efforts and did not complete potential acquisitions that did not meet our pricing criteria. During 2003, for example, we considered an acquisition of a large brokerage firm in Chicago, but decided against the potential transaction as a result of our due diligence process. This process led to diversion of a significant amount of management’s time, which weighed against other acquisition efforts. We still continue to have a goal of acquiring an average of 2 hub operations per year, increasing our base of U.S. hubs to 15 from the current six. Acquisitions will be driven by opportunity, pricing and fit, however, not by a rigid timetable.

Our revenue base is diversified across a large number of insurance products and services, including:

Commercial insurance

Property and casualty	Employee benefits	Risk management services
•   Business property •   Auto and trucking fleets •   Technology •   Intellectual property •   Natural disaster •   Workers’ compensation •   Liability •   Surety bonds •   Business income •   Accounts receivable •   Environmental risks	•   Group life and health •   Employment issues •   Human resources •   Retirement plans •   Contract review	•   Claims management •   Risk finance structuring •   Exposure evaluation •   Coverage analysis •   Contract review

ANNUAL REPORT December 31, 2003 HUB INTERNATIONAL LIMITED    21 

Personal insurance

Property and casualty	Life, health and financial
•   Home •   Personal property •   Auto and recreational vehicles •   Travel accident and trip cancellation	•   Disability •   Life •   Investments •   Financial planning

Commercial lines have increased as a percentage of our total revenue, increasing to 77% in 2003 from 18% in 2001, largely as a result of our more rapid expansion in the United States, where middle market companies and other commercial clients are the primary source of revenue. In 2003, commercial lines constituted 89% of U.S. revenue and 58% of Canadian revenue. In British Columbia (Canada), we are the largest broker of government underwritten auto insurance, a personal line. In addition, Canada’s public health care system eliminates a significant portion of the demand for employer-provided health insurance, a major commercial product line for us in the United States.

We employ a number of distribution channels to deliver products and services to clients. Among the distribution channels we employ are:

• Retail sales and service centers that target middle-market companies, providing a broad range of property and casualty insurance, life and health insurance, risk management and financial services;

• Retail call-centers provide sales and services by telephone to individuals or members of employee groups, associations, affinity groups and specific communities. We operate call-centers in Chicago, and in Saint John, New Brunswick and Chilliwack, British Columbia;

• Wholesale life and financial services centers, known as managing general agents, provide life and financial products and expertise to independent agents on a wholesale basis from our locations in Vancouver, Calgary, Montreal and Toronto;

• Wholesale property and casualty insurance centers provide products, international risk solutions, captive management programs and specialty lines to independent brokers and corporations in North America and globally from offices in New York, Toronto, Montreal and Vancouver.

In addition, we are a member of the Worldwide Broker Network, a consortium of international brokerages which we can access to service U.S. or Canadian clients who require insurance internationally.

Because we have a diverse mix of products, services, insurer relationships and distribution channels, revenue and profitability levels are not usually highly susceptible to major changes as a result of a single product or service. (An exception occurred in 2003. See “US Results” on page 25.) However, general economic trends can influence both overall insurance rates — and commissions — and availability or costs of individual types of coverage.

During the 1990s, for example, insurance rates were generally considered low, or “soft,” as insurance companies sought to maximize the flow of premium dollars that they could invest profitability in a rising stock market and in other investments. Beginning in 2000, as return on investment began to shrink, insurance rates began to rise, or “harden,” a pace that accelerated rapidly after the terrorist attack of September 11, 2001. During the past two years, premium rates have remained firm for most types of coverage, rising 10% to 15% per year in many cases. During 2003, the Canadian market remained firm, but the U.S. market experienced some softening of premium rates for property and casualty coverage. Rates for liability, health and other types of coverage continued to experience increases however. Looking toward 2004, we anticipate some continued softening in the U.S. market and the beginning of softening in the Canadian market as the year progresses.

For us, as for other brokers, rising rates can present both positive and negative effects. Rising premiums usually yield stronger commission levels, if the insurance buyer maintains its coverage levels. However, many insurance buyers will respond to rising rates by reducing total coverage, often by raising deductibles, reducing limits of coverage, or by leaving some risks uninsured. In addition, a weak economic environment often leads to lower sales and employee headcounts at client companies, leading in turn to reduced demand for employee benefits, liability and other types of coverage tied to business activity levels. Our ability to achieve organic revenue growth is not solely dependent on

  22   HUB INTERNATIONAL LIMITED ANNUAL REPORT December 31, 2003

rising or declining rates, but results from a more complex mixture of general economic growth, access to coverage from insurers and marketing/sales expertise.

Our strategic plan has traditionally included a highly decentralized structure that offered a large degree of autonomy to each regional “hub” operation. We have sought to acquire strong businesses and retain the services and commitment of the management teams that built those businesses successfully. Decentralization has been a core component of this growth plan. As the company continues to grow, however, it is likely that added investment will be made to coordinate more functions from the head office, enhancing the potential for cross-selling, international coordination, marketing efficiency, total expense management and financial controls.

Because we are a service organization, compensation and other personnel costs make up the largest component of total expenses — 70% in 2003. Property and equipment are comprised primarily of furniture, computer systems and office equipment. Therefore, Hub’s capital resources, including external borrowings, internally generated cash flow and issuance of common shares, are targeted primarily toward acquisitions.

Results of Operations

Year ended December 31, 2003 compared to year ended December 31, 2002

We achieved growth in revenue and profitability in 2003. Although the pace of acquisitions did not match that of 2002, we benefited from strong organic growth rates in most hubs, contributions from brokerages acquired in 2002 and the currency exchange benefits of a strengthening Canadian dollar. Overall, our management believes the company made strong progress on several fronts in 2003, including increased penetration of the commercial middle market in British Columbia, expansion of the professional liability practice in Chicago and growth of the wholesale brokerage business in New York and Toronto.

As a result of these and other factors, we reported a 30% revenue increase to $286.4 million in 2003, while net earnings increased 24% to $36.5 million. Diluted earnings per share increased 8% to $1.14 from $1.06. The slower rate of growth in diluted earnings per share as compared to growth in revenue and net earnings reflected a larger number of average shares outstanding, resulting from both our U.S. IPO in June 2002 and the use of common shares in both acquisitions and compensation programs.

ANNUAL REPORT December 31, 2003 HUB INTERNATIONAL LIMITED    23 

The table below shows a breakdown of our revenue by segment and type for 2003 including organic growth for 2003:

(in thousands of U.S. dollars, except percentages)

	Revenue									Adjustment for
					Total net		Total net			(acquisitions)			Organic			Organic
	2003		2002		change($)		growth(%)			and disposals			growth($)			growth(%)
Total
Commission Income	$	259,461	$	200,976	$	58,485		29	%	$	(36,303	)	$	22,182			11	%
Contingent Commissions and Volume Overrides		18,530		11,464		7,066		62	%		(2,951	)		4,115			36	%
Other Income		8,368		7,520		848		11	%		(749	)		99			1	%
Total	$	286,359	$	219,960	$	66,399		30	%	$	(40,003	)	$	26,396			12	%
U.S.
Commission Income	$	158,025	$	120,741	$	37,284		31	%	$	(35,038	)	$	2,246			2	%
Contingent Commissions and Volume Overrides		13,493		7,780		5,713		73	%		(2,872	)		2,841			37	%
Other Income		5,701		5,628		73		1	%		(753	)		(680	)		(12	)%
Total	$	177,219	$	134,149	$	43,070		32	%	$	(38,663	)	$	4,407			3	%
Canada
Commission Income	$	101,436	$	80,235	$	21,201		26	%	$	(1,265	)	$	19,936			25	%
Contingent Commissions and Volume Overrides		5,037		3,684		1,353		37	%		(79	)		1,274			35	%
Other Income		2,667		1,892		775		41	%		4			779			41	%
Total	$	109,140	$	85,811	$	23,329		27	%	$	(1,340	)	$	21,989			26	%

Of the $66.4 million in new revenue we reported, $40.0 million, or 60% reflected growth through acquisition, while $26.4 million, or 40% resulted from organic growth. By comparison, acquired units added $46.1 million, or 70% of 2002’s sales growth, while organic growth contributed $19.9 million, or 30% of our revenue increases. Organic growth figures for both revenue and earnings include the impact of foreign exchange rate changes between the U.S. and Canadian dollars. In 2003, the rise of the Canadian dollar versus the U.S. dollar contributed 5 percentage points of our 12% organic growth rate in revenue.

Commission income, which usually ranges from 5% to 20% of the premium charged by insurers, provides approximately 91% of our revenue base. In addition to these “core” commissions, the company derives revenue from:

• Volume overrides — additional compensation paid by insurance companies to brokerages on the basis of the overall volume of business a brokerage places with the insurance company.

• Contingent commissions — additional compensation based on the profit an insurance company makes on the book of business a brokerage places with the insurance company.

• Other income — comprised of fees and interest income, including income earned while we hold client premiums on behalf of insurance companies.

Volume overrides and contingent commissions are typically paid in the first or second quarter, based on prior-year performance. The sharp increase in contingent commissions and volume overrides in 2003 reflected increased profitability of business placed by us at higher premium rates and increased concentrations of some placements among a group of selected insurers.

In addition to the variations that can result from changes in organic growth rates, acquisitions and other variables related to operations, both 2003 and 2002 results included a number of factors that can complicate any efforts at

  24   HUB INTERNATIONAL LIMITED ANNUAL REPORT December 31, 2003

direct comparisons. The following chart shows the net earnings and diluted per-share impacts that several of these factors had over the past two years. They are shown here as an added disclosure to increase investor understanding.

(in thousands of U.S. dollars, except
per share amounts)		Net Earnings			Diluted EPS
2003 net earnings (Canadian GAAP)		$	36,509		$	1.14
	Impact of foreign exchange		(2,056	)		(0.06	)
	Life insurance proceeds		(1,000	)		(0.03	)
	Non-cash stock based compensation		4,801			0.14
	Adjusted 2003 results	$	38,254		$	1.19
2002 net earnings (Canadian GAAP)		$	29,401		$	1.06
	Gain on sale of Old Lyme		(2,613	)		(0.09	)
	Non-cash stock based compensation		1,089			0.04
	Adjusted 2002 results	$	27,877		$	1.01

As shown above, we benefited from both a stronger Canadian dollar and the receipt of life insurance proceeds in 2003, while 2002 results were strengthened by the sale of two insurance subsidiaries. The impact of foreign exchange on 2002 earnings was insignificant. In addition, 2003 included a full year’s amortization of non-cash stock based compensation, versus 2002 which included only six months of amortization. Excluding the effects of these items, net income would have increased 37% in 2003, versus 24% under Canadian GAPP, and diluted earnings per share would have increased 18% in 2003, versus 8% under Canadian GAAP.

Changes in currency exchange rates are not an unusual item. Because we derive our revenue from both the United States and Canada and do not use derivatives to manage our Canadian pre-tax income, foreign exchange fluctuations will continue to impact our results. We have highlighted the impact of these changes because currency translation effects can lead to reported results that are less meaningful than local-currency results as an indicator of underlying operations. This year the strength of the Canadian dollar versus the U.S. dollar had a positive impact on our results. A decline would have a negative effect. See “Market Risk”.

U.S. Results

U.S. revenue grew 32% to $177.2 million, or 62% of revenue, in 2003, due to both organic growth and the contributions of operations acquired in 2002. Acquisitions added $38.7 million to revenue — 90% of the increase — while organic growth provided $4.4 million, or 10% of revenue growth. Our U.S. operations posted an organic growth rate of 3% in 2003, an 81% decrease from 16% in 2002. Core commission income increased 2%, while contingent commissions and volume overrides grew 37%.

During 2003 we experienced an unusual timing issue at a single hub that provides lender-placed auto insurance coverage for financial institutions. Lender-placed coverage is primarily collision coverage on automobiles financed through a financial institution. This is a high-volume business that is generally very profitable for us. However, in the third quarter of 2003, two financial institutions adjusted their credit policies, leading to cancellation of several quarters’ worth of policies in a single quarter resulting in 2003 revenue being reduced by approximately $4.3 million. Excluding the impact of this product line, U.S. organic growth was 9% in 2003.

During 2003, U.S. insurance premium rates remained strong — or hard — for most product lines, although rates for property coverage showed only modest increases as the year progressed. Hard insurance pricing in 2002 contributed strongly to a significant increase in contingent profitability income from insurers in 2003, as these insurers benefited from the near-term impact of higher rates implemented in 2002. Our management believes contingent commissions are likely to rise or decline only marginally in 2004 versus 2003 levels, reflecting a relative moderation in the pace of rate increases.

In the United States, our brokerages benefited from new business generation, additional revenue from businesses acquired during 2002 and moderate premium rate increases. While higher premium rates on most product lines

ANNUAL REPORT December 31, 2003 HUB INTERNATIONAL LIMITED    25 

added nominally to total premium amounts, client response to higher rates often included a reduction in total coverage, increasing deductibles and other cost-savings techniques. In addition, the relative weakness in the U.S. economy led to declines in sales levels and staff headcount at many of our clients. Many products, including employee benefits and product liability coverage, are linked closely to the level of business activity at our clients. A weak economy reduces total risk, total coverage and total premiums for these clients.

As a result, our management believes an economic recovery that adds jobs and revenue at our client could make a meaningful contribution to organic growth in 2004. In addition, stronger revenue and earnings of our clients could lead these clients to reinstate coverages or lower deductibles, which also would have a beneficial impact on total premiums and commissions.

Canadian Results

Canadian revenue grew 27% to $109.2 million, or 38% of consolidated revenue, in 2003, primarily as a result of a strengthening of the Canadian dollar against the U.S. dollar as well as organic growth. Canadian brokerages posted organic growth of 26%, of which 14 percentage points reflected a stronger Canadian dollar. Acquisitions added only $1.3 million, or 6%, of the revenue increase, reflecting a slower pace of fold-in acquisitions in Canada than in the United States. Apart from foreign currency gains, in Canada, our brokerages benefited from strong organic growth and a sustained pace of increases in insurance premium rates. Canadian rate trends have trailed those of the United States, leading to expectations that Canadian premium rates will continue to be firm for much of 2004, with some softening as the year progresses. Because Canadian revenue includes a lower percentage of commercial business and more personal lines, any acceleration in economic growth that adds to payrolls is not expected to have as strong a benefit in Canada as in the United States. The strong rate of organic growth in Canada reflected both increased market penetration and continued strength in premium rates. Our strong relationships with and access to insurers in Canada proved to be an important competitive advantage in 2003, leading to increased sales to clients who were unable to obtain coverage from other sources. As was the case in the United States, Canadian operations benefited strongly from an increase in contingent commissions and volume overrides, which grew 37% in 2003, versus a decline of 12% in 2002.

Compensation Expense

The majority of our expenses are related to compensation, which increased 35% in 2003 to $161.1 million. As a percentage of revenue, compensation increased to 56% from 54% in 2002, due in large part to an increase in non-cash stock based compensation. Total compensation includes both cash based salaries and benefits and non-cash stock based compensation. Cash-based compensation grew 32% to $156.3 million in 2003, while non-cash stock based compensation increased 341% to $4.8 million.

								% of
($ in thousands)	2003		2002		% Change			Revenue
Compensation Comparison
Compensation (cash)	$	156,320	$	118,667		32	%		54	%
Non-cash stock based compensation		4,801		1,089		341	%		2	%
Total	$	161,121	$	119,756		35	%		56	%

We have undertaken a number of initiatives to reduce or maintain compensation expense. During 2002, members of the executive management group agreed to accept 50% of their earned bonuses in the form of stock options, rather than cash. At the close of 2003, we obtained agreement from managers to restructure the company’s management bonus agreement. Under the new agreement the non-cash stock option component of the annual bonus was eliminated in exchange for restricted share units to be issued in the first quarter of 2004. In addition, whereas the management bonus agreement was previously contractual in nature, the restructured plan is no longer contractual and may be subject to change as we deem necessary. Management has estimated that approximately $16.9 million of restricted share units will be issued in connection with the modifications. The amount of restricted share units to be issued was based upon a multiple of the previous two years average bonus. The restricted share units will all vest in full on January 1, 2011 subject to continued employment. Although the impact of this change is

  26   HUB INTERNATIONAL LIMITED ANNUAL REPORT December 31, 2003

expected to be earnings-neutral in 2004, the long-term effect is to reduce compensation costs as a percentage of revenue.

In addition to cash compensation, we have employed non-cash compensation tools such as stock options, restricted shares and restricted share units for senior employees. In response to investor interest in the true impact of these costs, we began recognizing the expense of non-cash stock based compensation during 2002. We recognized $4.8 million of expense for the full year in 2003, including both stock options and restricted share units, versus $1.1 million of expense for two quarters of 2002. Options vest evenly over three years and expire in seven years from issuance. Shares derived from the options are held in escrow for a period of five years from the date the options are granted, subject to early release in certain circumstances. Restricted share units vest over periods ranging from 48 months to 95 months. Our policy is to expense the fair value of non-cash stock based compensation to employees over the period in which entitlement to the compensation vests. The amount of expense recognized in each quarter related to stock options will vary with respect to exercise and forfeiture of options.

In total, as of December 31, 2003, we had issued and outstanding approximately 1.5 million stock options at a weighted average exercise price of $15.64. Our closing share price on the New York Stock Exchange was $16.76 on December 31, 2003.

Selling, Occupancy and Administration Expense

Selling, occupancy and administration expense increased 26% to $56.6 million in 2003. As a percentage of revenue, selling, occupancy and administration expense declined slightly to 19.8%, versus 20.4% in 2002.

Depreciation

Depreciation declined slightly to 2.2% of revenue in 2003 from 2.5% in 2002. The lower relative impact reflected control of capital expenditures while revenue grew. This number is not particularly important, as our business is not driven by capital expenditures.

Interest Expense

Interest expense decreased 29% to $5.2 million from $7.3 million in 2002. This decline reflected in large part the application of $80 million in proceeds for the 2002 IPO to pay down debt. In addition, interest expense was reduced by the benefits of performance-based forgiveness of interest payments due under a loan agreement with an insurer and an interest rate swap during the third and fourth quarters of 2003. The interest rate swap effectively converted $65 million of fixed interest rate senior notes into floating rate instruments, reducing interest expense on the senior notes by $0.8 million in 2003.

Intangible Asset Amortization

In January 2004, we adopted a corporate marketing and positioning strategy to build awareness of the Hub brand across all of our markets and to encourage greater coordination and collegial identity among our employees. As part of this corporate consolidation and identity development program, we have reassigned a number of key executives to new or expanded areas of responsibility and determined that future marketing and communications will be conducted under the Hub International name, rather than the traditional corporate names of acquired brokerages. As a result, in the first quarter of 2004 certain of our subsidiaries changed their names and as a result, we will recognize a non-cash impairment expense of approximately $2.6 million before tax related to trademarks.

Gain on Put Option Liability

In addition to the issuance of stock options, we issued put options to a number of individuals as part of the sale of their brokerages to us. These put options allowed the former owners to require us to repurchase our shares issued to them when we acquired their brokerages. We negotiated the cancellation of put options with one group of former owners during 2002 and negotiated the cancellation of all remaining put options during 2003.

Provision for Income Tax Expense

Our effective tax rate increased in 2003 to 34% from 33%. The difference in tax rates was affected most directly by non-taxable items in both 2003 and 2002. Approximately $2.6 million of 2002 earnings — resulting from the sale of

ANNUAL REPORT December 31, 2003 HUB INTERNATIONAL LIMITED    27 

two subsidiaries, Old Lyme Insurance Company of Rhode Island Inc. and Old Lyme Insurance Company, Ltd. (collectively, “Old Lyme”) — were non-taxable, while $1 million of 2003 earnings — resulting from life insurance proceeds — were non-taxable. Absent these two items, the tax rates were unchanged at approximately 34.7% in both years. Based on existing operations, management anticipates that our effective tax rate will likely be in the range of 36% — 39% in 2004.

Net Earnings and Earnings Per Share

Our net earnings increased 24% to $36.5 million in 2003, primarily as a result of growth in revenue. As a percentage of revenue, net earnings declined approximately 0.6 percentage points to 12.8% in 2003 from 13.4% in 2002. Diluted earnings per share increased at a somewhat slower rate than net earnings — 8% to $1.14, due primarily to a larger number of shares outstanding.

Our use of shares as a core component of our acquisition proceeds and as a form of executive compensation has led to significant increases in the number of shares outstanding over the past few years. In addition, we issued 6.9 million common shares in our June 2002 U.S. IPO and listing on the New York Stock Exchange. The weighted average number of diluted shares outstanding increased from 20.1 million in 2001 to 30.2 million in 2002 and 33.8 million in 2003. The impact of new acquisitions on the level of weighted average diluted shares outstanding in 2004 will be determined by both the size of acquisitions and their timing within the coming year.

As shown in the table on page 25, net earnings increased $2.6 million or $0.09 per diluted share, in 2002 on the sale of two insurance subsidiaries and decreased $1.1 million or $0.04 per diluted share due to non-cash stock based compensation. In 2003, diluted earnings per share increased $0.03 per diluted share from life insurance proceeds and another $0.06 per diluted share from foreign exchange rates and net earnings decreased $4.8 million or $0.14 per diluted share due to non-cash stock based compensation. Excluding these effects our diluted earnings per share would have increased from $1.01 in 2002 to $1.19 in 2003 on a comparable basis.

Year ended December 31, 2002 compared to year ended December 31, 2001

	Revenue										Adjustment for
					Total Net			Total Net			(Acquisitions)			Organic			Organic
	2002		2001		Change($)			Growth(%)			and Disposals			Growth($)			Growth(%)
Total
Commission Income	$	200,976	$	143,063	$	57,913			40	%	$	(39,213	)	$	18,700			13	%
Contingent Commissions and Volume Overrides		11,464		5,899		5,565			94	%		(4,194	)		1,371			23	%
Other Income		7,520		5,031		2,489			49	%		(2,702	)		(213	)		(4	)%
Total	$	219,960	$	153,993	$	65,967			43	%	$	(46,109	)	$	19,858			13	%
U.S.
Commission Income	$	120,741	$	71,202	$	49,539			70	%	$	(39,906	)	$	9,633			14	%
Contingent Commissions and Volume Overrides		7,780		1,693		6,087			360	%		(4,214	)		1,873			111	%
Other Income		5,628		2,534		3,094			122	%		(2,729	)		365			14	%
Total	$	134,149	$	75,429	$	58,720			78	%	$	(46,849	)	$	11,871			16	%
Canada
Commission Income	$	80,235	$	71,861	$	8,374			12	%	$	693		$	9,067			13	%
Contingent Commissions and Volume Overrides		3,684		4,206		(522	)		(12	)%		20			(502	)		(12	)%
Other Income		1,892		2,497		(605	)		(24	)%		27			(578	)		(23	)%
Total	$	85,811	$	78,564	$	7,247			9	%	$	740		$	7,987			10	%

Revenue

We increased total revenue by $65.9 million, or 43%, to $219.9 million in 2002 from $154.0 million in 2001. Of this increase, $46.1 million or 70% was attributable to acquisitions, primarily from the acquisitions of Kaye, Burnham and

  28   HUB INTERNATIONAL LIMITED ANNUAL REPORT December 31, 2003

Flanagan in 2001, and $19.9 million or 30% was attributable to organic growth. Commission income increased by $57.9 million, or 40%, to $200.9 million in 2002, from $143.1 million in 2001. Excluding the effect of acquisitions, commission income increased by $18.7 million, or 13%, due to organic growth, including the continued firming of insurance premium rates. In 2002, revenue from contingent commissions and volume overrides increased by $5.6 million, or 94%, to $11.5 million from $5.9 million in 2001. Excluding the effects of acquisitions of $4.2 million, contingent commissions and volume overrides increased by $1.4 million or 23% as compared with the prior year. This increase resulted primarily from contingent commissions earned in the third and fourth quarters of 2002 from Fairfax related to premium volume placed with Old Lyme. In 2002, other income, which includes fees and interest income, increased by $2.5 million, or 49%, to $7.5 million from $5.0 million in 2001. Excluding the effects of acquisitions of $2.7 million, other income decreased by $0.2 million.

U.S. Results

Total revenue from U.S. Operations increased by $58.7 million, or 78%, to $134.1 million in 2002 from $75.4 million in 2001. Excluding the effect of acquisitions, total revenue increased $11.9 million, or 16%, primarily due to increases in commission income. Commission income increased by $49.5 million, or 70%, to $120.7 million in 2002 from $71.2 million in 2001. Excluding the effect of acquisitions, commission income increased $9.6 million, or 14% due to organic growth and higher premium rates. Revenue from contingent commissions and volume overrides increased by $6.1 million, or 360%, to $7.8 million in 2002 from $1.7 million in 2001. Excluding the effect of acquisitions of $4.2 million, contingent commissions and volume overrides increased by $1.9 million, or 111%, as compared with the prior year. Of this increase, $1.2 million was attributable to contingent commissions earned in the third and fourth quarters of 2002 from Fairfax, as previously discussed, and the remainder was the result of enhanced relationships established with other insurance companies. Other income, which includes fees and interest income, increased by $3.1 million, or 122%, to $5.6 million in 2002 from $2.5 million in 2001. Excluding the effect of acquisitions of $2.7 million, other income increased $0.4 million, or 14% from 2001. This increase is due to an increase in income earned related to the financing of client premiums partially offset by lower interest income as a result of a decrease in interest rates compared with the prior year.

Canadian Results

Total revenue from Canadian Operations increased by $7.2 million, or 9%, to $85.8 million in 2002 from $78.6 million in 2001. Excluding the effect of net dispositions of $0.7 million, total revenue increased by $8.0 million or 10%. This increase was due to increases in commission income. Commission income increased by $8.3 million, or 12%, to $80.2 million in 2002 from $71.9 million in 2001. Excluding the effect of net dispositions of $0.7 million, commission income increased by $9.1 million, or 13%, the result of organic growth and higher premium rates. Contingent commissions and volume overrides decreased by $0.5 million, or 12%, to $3.7 million in 2002 from $4.2 million in 2001. This decrease was primarily attributable to deteriorating loss ratios on business placed with insurance companies during 2001. Other income, which includes fees and interest income, decreased by $0.6 million, or 24%, to $1.9 million in 2002 from $2.5 million in 2001. This decrease was attributable primarily to lower interest rates in 2002 compared with 2001.

Compensation Expense

Compensation expense in 2002 increased by $30.7 million, or 35%, to $118.7 million from $88.0 million in 2001. Compensation expense as a percentage of total revenue decreased 3% to 54% from 57% in 2001. This proportional decrease resulted largely from revenue growth as certain fixed compensation expense remained constant, and from a decrease in the accrual of executive management profitability bonuses (approximately $4.7 million or 2.1% of revenue) associated with the granting of stock options. In 2002 we changed our executive management bonus plan to require that 50% of earned bonuses be paid with stock option awards.

Selling, Occupancy and Administration Expense

Selling, occupancy and administration expenses increased by $9.6 million, or 27%, to $44.9 million in 2002 from $35.3 million in 2001. As a percentage of total revenue, selling, occupancy and administration expenses decreased to 20% in 2002 from 23% in 2001. This decrease was due to efforts to ensure that certain fixed costs remained constant while revenue grew.

ANNUAL REPORT December 31, 2003 HUB INTERNATIONAL LIMITED    29 

Depreciation

Depreciation expenses increased by $1.6 million, or 39%, to $5.5 million in 2002 from $3.9 million in 2001. Depreciation expenses remained unchanged as a percentage of total revenue at 3% in both 2002 and 2001.

Interest Expense

Interest expense decreased by $0.1 million, or 2%, to $7.3 million in 2002 from $7.4 million in 2001. In June 2002, we repaid $122.5 million of our total outstanding long-term debt and subordinated convertible debentures with proceeds from the sale of Old Lyme and our U.S. initial public offering. This reduction in debt decreased interest expense in the third and fourth quarter of 2002 by approximately $1.5 million per quarter compared to 2001.

Goodwill and Other Intangible Asset Amortization

Intangible asset amortization decreased by $3.2 million, or 66%, to $1.7 million in 2002 from $4.9 million in 2001. This decrease is attributable to the elimination of goodwill amortization, effective January 1, 2002, in accordance with The Canadian Institute of Chartered Accountants Accounting Standards Board Handbook Section 3062, “Goodwill and Other Intangible Assets.”

Gain on Disposal of Investment Held for Sale, Property, Equipment and Investments

These gains have increased by $2.5 million, or 1449%, to $2.7 million in 2002 from $0.2 million in 2001. Included in 2002 is a $2.6 million, non-taxable gain on the sale of Old Lyme. This gain increased basic and diluted earnings per share by $0.11 and $0.09, respectively. As part of our acquisition of Kaye in 2001, we acquired Old Lyme, with the intent to sell the operation and have since sold it to a subsidiary of Fairfax at a purchase price equivalent to its U.S. GAAP book value as of December 31, 2001 of approximately $43.5 million. The sale of Old Lyme was completed on May 30, 2002. As of December 31, 2002, Fairfax owned 27% of our common shares. Prior to the sale, we recorded Old Lyme as an investment available for sale, and accordingly, its results of operations are not included in our consolidated earnings.

Gain on Put Option Liability

The gain on put option liability of $0.2 million in 2002, as compared to $0.7 million in 2001, reflect changes in the fair value of put options granted by us. We issued put options as consideration for certain businesses acquired in the second and third quarters of 2001. The related put option liability is classified as long-term debt at fair value until such time as the options are exercised or expire. Factors affecting the fair market value of the put option are the stock price, stock volatility, and interest rates.

Non-cash Stock Option Compensation

Non-cash stock option compensation of $1.1 million in 2002 reflects the impact of approximately 1.3 million stock options granted in June of 2002. The options were granted with an exercise price of $15.67 per share (fair market value at date of grant) and vest evenly over three years. The options expire in seven years. Our policy is to expense the fair value of stock options granted to employees over the period in which entitlement to the compensation vests. Non-cash stock option compensation was 0.5% of total revenue for 2002.

Provision for Income Tax Expense

Income taxes in 2002 and 2001 amounted to $14.3 million and $5.3 million, respectively, resulting in an effective tax rate of 33% and 34% in 2002 and 2001, respectively. This decrease in effective tax rate was primarily the result of the non-taxable gain of $2.6 million on the sale of Old Lyme.

Net Earnings

Net earnings in 2002 increased by $19.4 million, or 194%, to $29.4 million in 2002 compared with $10.0 million in 2001. Basic earnings per share increased 140% to $1.27 in 2002 compared with $0.53 per share in 2001. Diluted earnings per share increased 112% to $1.06 in 2002 from $0.50 in 2001.

  30   HUB INTERNATIONAL LIMITED ANNUAL REPORT December 31, 2003

Cash Flow, Liquidity and Capital Resources

We improved our financial position and capacity for acquisitions in 2003 through positive cash flow from operations and a private debt offering. As a result of these factors, as of December 31, 2003, we had cash and cash equivalents of $82.1 million, an increase of 102%, from $40.6 million as of December 31, 2002. Operating activities generated $53.9 million of cash in 2003 compared to $19.1 million in 2002. The amount of cash provided by operating activities is affected by net earnings for the period, non-cash income and expenses, the collection of accounts and other receivables and the payment of accounts payable and accrued liabilities. In 2003, $20.1 million of cash was used in investing activities, primarily for the acquisitions of property and equipment and the purchase of subsidiaries compared to $8.4 million in 2002. Also in 2003, $4.6 million of cash was provided from financing activities, primarily resulting from our private debt offering, of $65.0 million, and offset by the repayment of long-term debt and capital leases, and the payment of dividends. In 2003, the effect of exchange rate changes on cash and cash equivalents was an increase of $3.1 million compared to $0.1 million in 2002. Net debt, defined as long-term debt ($78.8 million) and subordinated convertible debentures ($35.0 million) less non-trust cash (cash and cash equivalents of $82.1 million) as of December 31, 2003, was $31.7 million compared with $66.4 million as of December 31, 2002.

As a broker, we collect and hold premiums paid by clients, deduct commissions and other expenses from these payments, and hold the remainder in trust, which we remit to the insurers who provide coverage to clients. We earn interest on these funds during the time between receipt of the cash and the time the cash is paid to insurers. The cash held in trust is shown separately on our balance sheet. On the statement of cash flows, changes in trust cash are included as part of the change in non-cash working capital and the determination of cash provided from operating activities.

In addition to internally generated cash, we maintain two separate credit facilities:

(1)

Revolving U.S. dollar LIBOR loan — This undrawn facility was renegotiated in December 2003 subject to completion of the definitive amended agreement. Under the new terms, the unsecured facility totals $50 million and bears interest at a floating rate of prime plus 1% or 112.5 basis points above LIBOR, which were 1.12% and 1.42% at December 31, 2003 and 2002, respectively. The facility is available on a revolving basis for one year and expires on December 13, 2004; however if the revolving period is not extended, we may convert the outstanding balance under the facility to a three year non-revolving term loan repayable at the end of three years with an interest rate of 137.5 basis points above the Canadian dollar interest swap rate. An annual commitment fee of 20 basis points is assessed on the unused balance. Borrowings under this facility totaled $NIL and $50 million at December 31, 2003 and 2002, respectively. We are in compliance with all financial covenants governing this facility as of December 31, 2003 and 2002.

(2)

Demand U.S. dollar base rate loan — We have an undrawn $9.3 million facility which expires on July 18, 2004 and bears interest at the bank’s U.S. base rate plus 50 bonus points. Borrowings under this facility are repayable on demand.

In June 2003, we completed a private placement of $65 million in principal amount of unsecured senior notes. The senior notes were issued in two series. Series A represents $10 million of 5.71% senior notes with interest due semi-annually, and principal due of $3,333 annually, June 15, 2008 through June 15, 2010. Series B represents $55 million of 6.16% senior notes with interest due semi-annually, and principal due of $11,000 annually June 15, 2009 through June 15, 2013. The senior notes were sold on a private basis in the United States to institutional accredited investors. Net proceeds of the sale of the senior notes were used to pay down $50 million of our revolving U.S. Dollar LIBOR Loan with the balance held for general corporate purposes, which may include future acquisitions. We incurred approximately $0.7 million in fees and expenses related to the offering of these notes, which were capitalized and are being amortized to expense over the term of the notes. At December 31, 2003, $65 million was outstanding under the senior notes. We are in compliance with all financial covenants governing the senior notes.

On July 16, 2003, we entered into an interest rate swap agreement. The effect of the swap is to convert the fixed rate interest payments of 5.71% and 6.16% on $10 million and $55 million, respectively, of the senior notes in order to ensure that we pay a market related interest rate on a portion of our borrowings. Under Canadian GAAP, we account for the swap transaction using the synthetic instruments method under which the net interest expense on the swap and associated debt is reported in earnings as if it were a single, synthetic, financial instrument. As at

ANNUAL REPORT December 31, 2003 HUB INTERNATIONAL LIMITED    31 

December 31, 2003, we estimate the fair value of the swap to be $2.6 million, which is not recognized in these financial statements. Accordingly, $2.6 million is the estimated amount that we would need to pay to terminate the swap as of December 31, 2003.

Also at December 31, 2003 we had outstanding a $7.5 million term loan from an insurance carrier. The terms of the loan provide for an incentive arrangement whereby a credit can be earned that will reduce annual interest payments under the loan (based on target premiums placed with the carrier) and reduces the principal repayment due in February 2007 (based on both target premiums placed with the carrier as well as the loss ratio on premiums placed with the carrier). Credits were earned for 2003 and 2002 which reduced interest payments to zero from $750 and $229, respectively.

In addition to these primary credit sources, we ended 2003 with $6.3 million of subsidiary debt comprised of various notes payable, term loans and capital leases. We intend to repay these liabilities from internally generated cash flow, existing cash balances and/or borrowings under our credit facilities as the subsidiary debt becomes due during 2003 through 2010. Of the outstanding subsidiary debt, $0.5 million is secured by liens on certain assets of our subsidiaries.

Also at December 31, 2003, we had outstanding $35.0 million aggregate principal amount of 8.5% convertible subordinated notes due June 28, 2007 held by certain subsidiaries of Fairfax (the Fairfax notes). The Fairfax notes are convertible by the holders at any time into our common shares at C$17.00 per share. If Fairfax converted all of the Fairfax notes, Fairfax would own approximately 32% of our total outstanding common shares as of December 31, 2003, versus the 26% of outstanding shares held on that date.

At the close of 2003, our cash position included approximately $35.1 million deployed as working capital at the brokerage level and approximately $47.0 million available for acquisitions. It is impossible to define exactly how many acquisitions or how much new revenue could be acquired through the use of this cash, additional cash flow from operations and application of credit facilities, as acquisition pricing and other factors vary during the course of the year. However, we intend to use common shares as compensation for approximately 30-70% of the value of a hub acquisition, and generally have paid a multiple of 5-8 times earnings before interest, taxes, depreciation and amortization (frequently referred to as EBITDA) for acquired brokerages.

We believe that our capital resources, including existing cash, funds generated from operations and borrowings available under credit facilities, will be sufficient to satisfy the company’s financial requirements, including some strategic acquisitions, during the next twelve months. We may finance acquisitions with available cash or an existing credit facility, but may, depending on the number and size of future acquisitions, need to supplement our finance requirements with the proceeds from debt financing, the issuance of additional equity securities, or a combination of both.

Our debt to capitalization ratio (defined as debt expressed as a percentage of debt and shareholders’ equity) decreased to 25% at December 31, 2003, compared with 27% at December 31, 2002. If all lines of credit and other loan facilities were fully utilized by the company at December 31, 2003, our ratio of debt to capitalization would have been 34%, which is below the range 35% to 38% that our management believes is suitably conservative for our business model. Under our loan covenants, our debt to capitalization ratio must be maintained below the 45% level. As of December 31, 2003, we were in compliance with the financial covenants under all of our debt instruments.

  32   HUB INTERNATIONAL LIMITED ANNUAL REPORT December 31, 2003

Contingent obligations

The table below summarizes our contractual obligations and commercial commitments as of December 31, 2003:

Payments due by period			On		Less than		1 - 3		4 - 5		After
(in thousands)	Total		demand		1 Year		Years		Years		5 Years
Contractual Obligations
Long-term debt	$	78,149	$	—	$	3,134	$	9,883	$	17,798	$	47,334
Capital lease obligations		650		—		228		422		—		—
Operating lease obligations		61,493		—		10,963		26,671		12,648		11,211
Executive share purchase plan loans		489		—		—		—		—		489
Total	$	140,781	$	—	$	14,325	$	36,976	$	30,446	$	59,034

Acquisitions

In connection with the acquisition of Hooper Hayes and Associates, Inc., in 2002 we issued 196,000 shares (the “Retractable Shares”) that are being held in escrow subject to release over a period of three years upon the satisfaction of certain performance targets. As of December 31, 2003, 63,000 shares have been released from escrow.

As part of the negotiations of the contingent consideration for J.P. Flanagan Corporation (“Flanagan”) total additional consideration of 37,500 of our common shares were earned at December 31, 2003 valued at approximately $635, based on the closing price of the shares at December 31, 2003 on the NYSE. The common shares have been recorded as “issuable shares” and included in shareholders’ equity and goodwill has been increased by the same amount at December 31, 2003. Also as part of the negotiations the former owner agreed to relinquish his rights to put options on the 730,000 shares previously issued as well as on shares issued as contingent consideration. In addition we expect to issue non-cash stock based compensation in the form of 84,375 restricted share units in the first quarter of 2004. Half of these restricted share units will vest in 4 years and the balance will vest in 7 years.

In connection with other various acquisitions completed through December 31, 2003, we may be obligated to pay contingent consideration up to a maximum sum of approximately $8.2 million cash and $0.2 million in common shares based upon the acquired brokerages achieving certain targets. The contingent payments are payable on various dates through September, 2006 according to the terms and conditions of each purchase agreement. Any additional consideration will be recorded as an adjustment to goodwill once the contingency is resolved. In connection with contingent consideration earned as at December 31, 2003, the financial statements reflect a liability to pay cash of $71 and to issue common shares valued at approximately $635 as of December 31, 2003.

Other

In connection with our executive share purchase plan, under certain circumstances, we may be obligated to purchase loans for officers, directors and employees from a Canadian chartered bank totaling $4,513 and $5,077 as of December 31, 2003 and 2002 respectively, to assist in purchasing our common shares. As collateral, the employees have pledged 478,000 and 602,000 common shares as of December 31, 2003 and 2002, respectively, which have a market value of $8,105 and $7,677 as of December 31, 2003 and 2002, respectively. Interest on the loans in the amount of $279, $264 and $377 for the years ended December 31, 2003, 2002 and 2001, respectively, was paid by us and is included in compensation expense. We no longer make loans to our executive officers and directors.

We have undertaken a number of initiatives to reduce and maintain compensation expense. During 2002, members of the executive management group agreed to accept 50% of their earned bonuses in the form of stock options, rather than cash. At the close of 2003, we obtained agreement from managers to restructure the company’s management bonus agreement to reduce total compensation expense over the long term. Under the new agreement the non-cash stock option component of the annual bonus was eliminated in exchange for restricted

ANNUAL REPORT December 31, 2003 HUB INTERNATIONAL LIMITED    33 

share units to be issued in the first quarter of 2004. In addition, whereas the management bonus agreement was previously contractual in nature, the restructured plan is no longer contractual and may be subject to change as we deem necessary. Our management has estimated that approximately $16.9 million of restricted share units will be issued in connection with the modifications. The amount of restricted share units to be issued was based upon a multiple of the previous two years average bonus. The restricted share units will vest in full on July 1, 2011, subject to continued employment of the awardee. Although the impact of this change is expected to be earnings-neutral in 2004, the long-term effect is intended to be a slower rate of increase in compensation expense relative to revenue growth.

In the ordinary course of business, we are subject to various claims and lawsuits consisting primarily of alleged errors and omissions in connection with the placement of insurance. In the opinion of our management, the ultimate resolution of all asserted and potential claims and lawsuits will not have a material adverse effect on our consolidated financial position or results of operations.

Shareholders’ equity

Restricted share units.We committed to award, under our equity incentive plan, an aggregate of 266,000 restricted shares that would be paid for by the participants (none of whom are members of our senior management or directors) with loans either from us or from a bank (guaranteed by us). In addition, we committed to award an aggregate of 471,000 restricted share units that would be exercisable for common shares, without payment of cash consideration. On June 30, 2003, we awarded 610,000 restricted share units in satisfaction of substantially all of the above-mentioned commitments. The restricted share units vest over periods ranging from 68 months to 95 months. In the first quarter of 2004, 1,005,690 restricted share units were issued in connection with the restructure of our management bonus agreement and 84,375 restricted share units were issued in connection with the renegotiation of contingent consideration for Flanagan.

Share repurchases.For the year ended December 31, 2003, no common shares were repurchased by us, other than 6,470 common shares under the executive share purchase plan.

Shares reserved for issuance.As of December 31, 2003, 3.6 million common shares were reserved for issuance under our equity incentive plan. As of December 31, 2003, an aggregate of approximately 2.1 million stock options and restricted share units were outstanding which would reduce such shares reserved for issuance. The issuance of approximately 1,090,065 additional restricted share units in the first quarter of 2004 will also reduce such shares reserved for issuance.

Shareholders’ equity increased by $58.5 million, or 21%, to $342.8 million as of December 31, 2003 from $284.3 million as of December 31, 2002. This increase resulted from net earnings of $36.5 million, an increase in contributed surplus of $3.5 million related primarily to non-cash stock based compensation expense, $7.1 million increase due to the release of the put option liability, $0.4 million due to shares issued in conjunction with purchase of subsidiaries and other items, $1.0 million due to shares issued in conjunction with the contingent consideration payments, as well as an increase in the cumulative translation account of $18.0 million, due mainly to the strengthening of the Canadian dollar compared to the U.S. dollar in 2003. The increase in shareholders’ equity was offset by the payment of dividends of $6.1 million in 2003, and a reduction in share capital of $1.9 million as a result of a transfer from long-term assets on company funded loans to executives used to purchase company shares pursuant to our executive share purchase plan. We no longer make loans to our executive officers. This treatment is consistent with U.S. GAAP.

Market risk

Interest rate risk

We are exposed to interest rate risk in connection with our senior notes due to the interest rate swap entered into in July which converted the fixed rate interest payments on the $65 million of senior notes outstanding into floating rate payments. At December 31, 2003, we had $65 million of floating rate debt outstanding. Each 100 basis point increase in interest rates charged on the balance of our outstanding floating rate debt as of December 31, 2003 will result in approximately $0.4 million decrease in our earnings.

  34   HUB INTERNATIONAL LIMITED ANNUAL REPORT December 31, 2003

Exchange rate sensitivity

We report our revenue in U.S. dollars. Our Canadian operations earn revenue and incur expenses in Canadian dollars. Given our significant Canadian dollar revenue, we are sensitive to the fluctuations in the value of the Canadian dollar and are therefore exposed to foreign currency exchange risk. Foreign currency exchange risk is the potential for loss in revenue and net income as a result of a decline in the U.S. dollar value of Canadian dollar revenue due to a decline in the value of the Canadian dollar compared to the U.S. dollar.

The Canadian dollar is subject to volatility and had experienced a significant decline in its value compared to the U.S. dollar in 2001 and 2002 but has increased significantly in value throughout 2003. At December 31, 2003 and 2002 one U.S. dollar equaled $1.2924 and $1.5779 Canadian dollars, respectively. The table below summarizes the effect that a $0.01 decline or increase in the value of the Canadian dollar would have had on our revenue, net earnings and cumulative translation account for the twelve months ended December 31, 2003, 2002 and 2001.

(in thousands of U.S. dollars, except percentages)	2003		2002		2001
Revenue	+/-$	1,523	+/-$	1,346	+/-$	1,254
Net earnings	+/-$	195	+/-$	231	+/-$	146
Cumulative translation account	+/-$	343	+/-$	846	+/-$	729

The increasing proportion of our revenue derived from our U.S. Operations and earned in U.S. dollars has, in part, offset the potential risk of a decline in the Canadian dollar. We expect that the proportion of revenue earned in U.S. dollars will continue to increase, further mitigating our foreign currency exchange sensitivity. We have not entered into, and do not intend to enter into, foreign currency forward exchange agreements.

Goodwill and other intangible assets

Intangible assets arising from acquisitions consist of the following:

(in thousands of U.S. dollars)		2003			2002
Customer relationships		$	43,422		$	41,762
Non-competition covenants			2,643			2,298
Trademarks			2,587			2,587
Goodwill			323,185			296,513
Accumulated amortization			(23,072	)		(17,284	)
	Total	$	348,765		$	325,876

We completed our impairment testing on the balance of goodwill and intangible assets as of January 1, 2004, 2003 and 2002. Based on the testing performed, no impairment losses were incurred.

The amounts allocated to customer relationships were determined by discounting the expected future net cash flows from commissions with consideration given to remaining economic lives, renewals, and associated expenses. Non-competition covenants value were determined using an income approach with consideration given to economic benefits associated with having the covenants in place versus damages that would ensue absent the agreements; and in the case of trademarks, a cash flow royalty savings approach addressing the economic benefits of the trademarks to Hub was used. The balance of the excess purchase price is allocated to goodwill.

Customer relationships are amortized on a straight-line basis over their periods of duration, normally fifteen years. Many factors outside our control determine the persistency of our customer relationships and we cannot be sure that the value we have allocated will ultimately be realized. Non-competition covenants and trademarks are intangible assets that have an indefinite life and accordingly, are not amortized but are evaluated for impairment. When an employee leaves Hub, the non-competition covenant becomes effective and the value assigned is then amortized over the life of covenant. Prior to 2002 we amortized goodwill primarily over a period of forty years. Under the new accounting standards adopted in 2002, goodwill is not amortized and is evaluated annually for

ANNUAL REPORT December 31, 2003 HUB INTERNATIONAL LIMITED    35 

impairment. For the past three years ended December 31, 2003, our amortization has been comprised of the following:

(in thousands of U.S. dollars)		2003		2002		2001
Customer relationships		$	3,040	$	1,627	$	759
Non-competition covenants			168		44		56
Goodwill			—		—		4,125
	Total	$	3,208	$	1,671	$	4,940

We estimate that our amortization charges for intangible assets from 2004 through 2008 for all acquisitions consummated to date will be:

				��
Year ended December 31,
(in thousands of U.S. dollars)		2004			2005		2006		2007		2008
Customer relationships		$	3,089		$	3,089	$	3,089	$	3,072	$	3,068
Non-competition covenants			63			44		82		80		21
Trademarks			2,587			—		—		—		—
	Total	$	5,739		$	3,133	$	3,171	$	3,152	$	3,089

Related party transactions

We had transactions with, and recorded revenue from, the following related parties:

	2003		2002		2001
Northbridge Financial Corporation	$	18,504	$	12,787	$	9,761
Crum & Forster Holdings, Inc.		1,259		914		1,039
Fairfax Inc.		8,411		6,278		—
	$	28,174	$	19,979	$	10,800

As of December 31, 2003 and 2002, we had accounts receivable and accounts payable balances with the above related parties in the amounts of $3,185 and $17,999, for 2003, respectively, and $2,104 and $12,180 for 2002, respectively. All revenue and related accounts receivable and accounts payable are the result of transactions in the normal course of business. The companies above are related through common ownership by Fairfax, which owns approximately 26% of our common shares as of December 31, 2003.

As of December 31, 2003 and 2002, long-term debt related to put options of $NIL and $5,940, respectively, and subordinated convertible debentures of $35,000 at the end of both years, are due to related parties.

During 2003, 2002 and 2001, we incurred expenses related to rental of premises from related parties in the amount of $2,102, $1,691 and $1,373, respectively. At December 31, 2003 and 2002, we also had accounts receivable due from related parties in the amount of $3,530 and $3,801, respectively, of which the majority were loans to employees to enable them to purchase our common shares. Of the accounts receivable, as of December 31, 2003 and 2002, $1,918 and $2,207, respectively, were related to company loans to employees to purchase shares under our executive share purchase plan. As collateral, the employees have pledged 153,000 and 177,000 common shares as of December 31, 2003 and 2002, respectively, which have a market value of $2,590 and $2,263 as of December 31, 2003 and 2002, respectively.

Off-Balance Sheet Transactions

Under Canadian GAPP, we account for the interest rate swap transaction which converted fixed rate interest payments of 5.71% and 6.16% on the senior notes of $10 million and $55 million, respectively, using the synthetic instruments method. Under this method, we report in earnings the net interest expense on the swap and associated debt as if it were a single, synthetic, financial instrument. The fair value of the swap, estimated at $2.6 million is not

  36   HUB INTERNATIONAL LIMITED ANNUAL REPORT December 31, 2003

recognized in our Canadian GAAP financial statements. Under U.S. GAAP, we have designated the swap transaction of a hedge of changes in the fair value of our fixed rate debt caused by changes in interest rates and record the swap on our U.S. GAAP balance sheet at is fair value. Changes in fair value of the swap are reported in earnings. Changes in the fair value of the debt being hedged which are attributable to changes in interest rates are recognized in earnings by adjustment of the carrying amount of the debt. We have no other material off-balance sheet arrangements.

Critical Accounting Policies

Our significant accounting polices are more fully described in Note 2 to our consolidated financial statements. Certain of our accounting policies are particularly important to the portrayal of our financial position and results of operations and require the application of significant judgment by our management; as a result they are subject to an inherent degree of uncertainty. In applying those policies, our management uses its judgment to determine the appropriate assumptions to be used in the determination of certain estimates. Those estimates are based on our historical experience, terms of existing contracts and policies, our observance of trends in the insurance industry, information provided by our clients and information provided by outside sources, as appropriate. Our critical accounting policies include the recognition of commission income, the allocation of the purchase price of an acquisition, the measurement of goodwill and other intangibles and related impairment evaluation, and the valuation of stock-based compensation. These policies are discussed below.

Recognition of Commission Income

We recognize commission income and fees as of the effective date of our client’s policy unless information is not available relating to the determination of their policy premiums, in which case we recognize commission income and fees related to that policy when that information becomes available and the revenue can be reasonably determined. We maintain an allowance for estimated policy cancellations and commission returns based upon the application of historical policy cancellation and commission return rates to the current year revenue, adjusted for any known deviations. The allowance for estimated policy cancellations is based on our management’s judgment, and is regularly evaluated by management by taking into consideration factors such as changes in the nature and volume of policies; trends in actual and forecasted policy cancellations; and current economic conditions that may affect the likelihood of client policy changes or cancellations. If our actual policy cancellation rates are significantly different from our historical policy cancellation rates, and those changes have not been adjusted for in the allowance, our actual commission income may be significantly different from what we estimated.

Allocation of the Purchase Price of an Acquisition

The acquisition of new brokerages is a fundamental component of our strategy. When we acquire a business, the cost of the purchase is allocated to all of the assets acquired and liabilities assumed based on their fair values. Any excess of the cost of purchase over the net of the allocated amounts is recognized as goodwill. For significant acquisitions, we engage qualified third party valuators to assist us in conducting asset valuations.

The fair value of assets, including intangible assets, and liabilities may be determined using a number of valuation methods including net realizable values, market prices and discounted cash flows. The use of assumptions and estimates is inherent in each of these valuation methods. Valuation methods and their underlying assumptions and estimates are based on management’s judgment. The use of different judgments, estimates, or assumptions could produce different allocations of the purchase price and, as a result, different results of operations.

Goodwill and Other Intangible Assets

Intangible assets primarily represent goodwill, associated with our acquisitions. Goodwill represents the excess of the cost of purchase of acquired businesses over the fair market value of their identifiable net assets. The fair value of our subsidiary brokerages has been increasing primarily due to recent increases in premium rates and organic growth as previously discussed which has generally increased the commission earned by us.

ANNUAL REPORT December 31, 2003 HUB INTERNATIONAL LIMITED    37 

Effective January 1, 2002, we adopted Canadian Institute of Chartered Accountants (CICA) Accounting Standards Board Handbook Section 3062 and the U.S. Financial Accounting Standards Board SFAS No. 142, which change and conform the recognition, measurement and disclosure of“Goodwill and Other Intangible Assets” under Canadian and U.S. GAAP.

These new accounting standards require that we no longer amortize goodwill and intangible assets with indefinite useful lives. We test at least annually for impairment at the reporting unit level. We determine impairment by comparing the fair value of a reporting unit to its carrying value. The fair value of a reporting unit may be determined using a number of market valuation methods including quoted market prices, discounted cash flows and net realizable values. The use of assumptions and estimates is inherent in each of these valuation techniques. The valuation method and the underlying assumptions and estimates are based on management’s judgment. The use of different judgments, estimates and assumptions could produce different results in the application of the impairment tests and, as a result, significantly different results of operations.

The cost of definite lived intangible assets is amortized over the estimated remaining useful life of the assets. We regularly evaluate whether events or changes in circumstances indicate that the carrying amount of intangibles, other than goodwill and intangible assets with indefinite useful lives, may warrant revision or may not be recoverable. The estimation of the useful economic lives and the selection of estimates and assumptions used in conducting impairment tests require the exercise of judgment. The use of different judgments, estimates and assumptions could produce different results in the application of the impairment tests of the assets and, as a result, significantly different results of operations.

Stock-based compensation

Stock-based compensation includes both stock options, restricted shares and restricted share units. Our accounting policy is to recognize the fair value of stock based compensation as an expense over the period in which entitlement to the compensation vests.

We measure the fair value of stock options at the date of grant of the award and recognize this amount as compensation expense over the vesting period of the options. An alternative accounting treatment would be to follow the intrinsic value method for accounting for stock options.

We estimate the fair value of the stock options granted using the Black-Scholes valuation model, which requires us to make assumptions in relation to the expected term of the stock option, volatility in the price of the underlying common shares, interest rates and dividend yield. The fair value model is particularly sensitive to the changes in the price and price volatility of our common shares. The assumptions used are based on our management’s judgment and the use of different judgments, estimates, and assumptions could produce significantly different results of fair value of the stock options and, as a result, significantly different results of operations.

Effects of recent accounting pronouncements

We are not aware of any new accounting pronouncements which will impact on our financial reporting.

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Market Risk”.

  38   HUB INTERNATIONAL LIMITED ANNUAL REPORT December 31, 2003

Item 8.    Financial Statements and Supplementary Data

Index to consolidated financial statements

	Page
Report of Independent Auditors to the Board of Directors and Shareholders of Hub International Limited		40
Consolidated Balance Sheets as of December 31, 2003 and 2002		41
Consolidated Statements of Earnings for the Years Ended December 31, 2003, 2002 and 2001		42
Consolidated Statements of Retained Earnings for the Years Ended December 31, 2003, 2002 and 2001		43
Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and 2001		44
Notes to Consolidated Financial Statements for the Years Ended December 31, 2003, 2002 and 2001		45

Index to notes to consolidated financial statements

Footnote		Description	Page
	1	Nature of operations and recent significant transactions		45
	2	Summary of significant accounting policies		45
	3	Acquisitions		49
	4	Accounts and other receivables		52
	5	Intangible assets		53
	6	Property and equipment		54
	7	Accounts payable and accrued liabilities		55
	8	Debt		55
	9	Defined Contribution Plan		56
	10	Commitments and contingencies		57
	11	Shareholders’ equity		58
	12	Equity Incentive Plan		59
	13	Fair value of financial instruments		60
	14	Income taxes		61
	15	Interest and income taxes paid		62
	16	Segmented information		62
	17	Related party transactions		64
	18	Reconciliation to U.S. GAAP		65
	19	Quarterly data		68
	20	Subsequent event		68

ANNUAL REPORT December 31, 2003 HUB INTERNATIONAL LIMITED    39 

Report of Independent Auditors to the Board of Directors and Shareholders of Hub International Limited:

We have audited the accompanying consolidated balance sheets of Hub International Limited and its subsidiaries as of December 31, 2003 and 2002 and the related consolidated statements of earnings, retained earnings and cash flows for each of the years in the three year period ended December 31, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statement schedules based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in Canada and in the United States of America. Those standards require that we plan and perform an audit to obtain reasonable assurance 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hub International Limited and its subsidiaries as of December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 2003, in accordance with accounting principles generally accepted in Canada.

As discussed in Note 2 to the financial statements, the Company changed the method of accounting for goodwill and other intangible assets in 2002.

Chicago, Illinois

February 19, 2004

  40   HUB INTERNATIONAL LIMITED ANNUAL REPORT December 31, 2003

Hub International Limited

Consolidated Balance Sheets

As of December 31,

(in thousands of U.S. dollars)

	2003		2002
ASSETS
Current assets:
Cash and cash equivalents	$	82,052	$	40,642
Trust cash		54,534		53,648
Accounts and other receivables		163,728		136,573
Income taxes receivable		6,768		2,153
Future income taxes		2,865		3,324
Prepaid expenses		4,449		1,587
Total current assets		314,396		237,927
Goodwill		305,862		281,712
Other intangible assets		42,903		44,164
Property and equipment		24,181		21,298
Future income taxes		6,458		3,715
Other assets		6,803		8,060
Total assets	$	700,603	$	596,876
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	226,168	$	187,034
Contingent consideration payable		—		8,423
Income taxes payable		3,804		1,198
Future income taxes		114		1,164
Current portion long-term debt and capital leases		3,362		3,029
Total current liabilities		233,448		200,848
Long-term debt and capital leases		75,437		69,009
Subordinated convertible debentures		35,000		35,000
Future income taxes		13,928		7,745
Total liabilities		357,813		312,602
Commitments and Contingencies
Shareholders’ equity
Share capital		254,845		235,197
Issuable shares		721		13,743
Contributed surplus		4,806		1,234
Cumulative translation account		20,062		2,185
Retained earnings		62,356		31,915
Total shareholders’ equity		342,790		284,274
Total liabilities and shareholders’ equity	$	700,603	$	596,876

(the accompanying notes form an integral part of the financial statements)

ANNUAL REPORT December 31, 2003 HUB INTERNATIONAL LIMITED    41 

Hub International Limited

Consolidated Statements of Earnings

For the Years Ended December 31,

(in thousands of U.S. dollars, except per share amounts)

		2003			2002			2001
Revenue
	Commission income	$	259,461		$	200,976		$	143,063
	Contingent commissions and volume overrides		18,530			11,464			5,899
	Other		8,368			7,520			5,031
			286,359			219,960			153,993
Expenses
	Compensation		156,320			118,667			88,015
	Selling, occupancy and administration		56,606			44,932			35,276
	Depreciation		6,244			5,492			3,940
	Interest expense		5,191			7,317			7,447
	Intangible asset amortization		3,208			1,671			4,940
	Gain on disposal of investment held for sale, property, equipment and other assets		(202	)		(2,679	)		(173	)
	Gain on put option liability		(160	)		(186	)		(719	)
	Non-cash stock based compensation		4,801			1,089			—
	Proceeds from life insurance		(1,000	)		—			—
			231,008			176,303			138,726
Net earnings before income taxes			55,351			43,657			15,267
Provision for income tax expense
	Current		16,922			12,851			4,967
	Future		1,920			1,405			295
			18,842			14,256			5,262
Net earnings		$	36,509		$	29,401		$	10,005
Earnings per share
	Basic		$1.22			$1.27			$0.53
	Diluted		$1.14			$1.06			$0.50
Weighted average shares outstanding — Basic (000’s)			29,967			23,181			19,012
Weighted average shares outstanding — Diluted (000’s)			33,767			30,199			20,105

(the accompanying notes form an integral part of the financial statements)

  42   HUB INTERNATIONAL LIMITED ANNUAL REPORT December 31, 2003

Hub International Limited

Consolidated Statements of Retained Earnings

For the Years Ended December 31,

(in thousands of U.S. dollars)

	2003			2002			2001
Retained earnings — Beginning of year	$	31,915		$	6,995		$	587
Net earnings		36,509			29,401			10,005
Dividends		(6,068	)		(4,481	)		(3,597	)
Retained earnings — End of year	$	62,356		$	31,915		$	6,995

(the accompanying notes form an integral part of the financial statements)

ANNUAL REPORT December 31, 2003 HUB INTERNATIONAL LIMITED    43 

Hub International Limited

Consolidated Statements of Cash Flows

For the Years Ended December 31,

(in thousands of U.S. dollars)

		2003			2002			2001
OPERATING ACTIVITIES
Net earnings		$	36,509		$	29,401		$	10,005
Items not affecting working capital
	Amortization and depreciation		9,452			7,163			8,880
	Gain on disposal of investment held for sale, property, equipment and other assets		(202	)		(2,679	)		(173	)
	Gain on put option liability		(160	)		(186	)		(719	)
	Non-cash stock based compensation		4,801			1,089			—
	Future income taxes		1,920			1,405			295
Non-cash working capital items
	Trust cash		(886	)		(3,222	)		(38,070	)
	Accounts and other receivables		(4,067	)		(26,665	)		(5,511	)
	Prepaid expenses		(2,616	)		1,287			(299	)
	Accounts payable and accrued liabilities		13,431			11,673			32,571
	Other assets		(2,062	)		—			—
	Income taxes		(2,184	)		(202	)		1,863
Net cash flows from operating activities			53,936			19,064			8,842
INVESTING ACTIVITIES
Property and equipment — purchases			(6,125	)		(4,469	)		(10,298	)
Property and equipment — proceeds on sale			69			6			96
Proceeds from investment held for sale			—			43,521			—
Purchase of subsidiaries, net of cash received			(14,881	)		(50,813	)		(123,221	)
Sale of subsidiaries			1,098			2,623			—
Other assets			(307	)		684			(646	)
Net cash flows used for investing activities			(20,146	)		(8,448	)		(134,069	)
FINANCING ACTIVITIES
Bank debt			—			(55,000	)		55,122
Long-term debt — advances			65,000			51,175			21,096
Subordinated convertible debentures — advances			—			—			61,624
Long-term debt and capital leases — repayments			(54,540	)		(50,094	)		(5,154	)
Subordinated convertible debenture — repayment			—			(26,800	)		—
Share capital — issued for cash, net of issue costs			(61	)		88,147			3,621
Share capital — repurchases			—			—			(281	)
Proceeds from sale of executive purchase plan shares			222			—			—
Dividends paid			(6,068	)		(4,481	)		(3,597	)
Net cash flows from financing activities			4,553			2,947			132,431
Effect of exchange rate changes on cash and cash equivalents			3,067			100			(144	)
Change in cash and cash equivalents			41,410			13,663			7,060
Cash and cash equivalents — Beginning of year			40,642			26,979			19,919
Cash and cash equivalents — End of year		$	82,052		$	40,642		$	26,979

(the accompanying notes form an integral part of the financial statements)

  44   HUB INTERNATIONAL LIMITED ANNUAL REPORT December 31, 2003

HUB International Limited

Notes to Consolidated Financial Statements

For the years ended December 31, 2003, 2002 and 2001

(In thousands, except per share amounts or as otherwise indicated)

1.  Nature of operations and recent significant transactions

Business operations

Hub International Limited (the “Company”) is an international insurance brokerage that provides a variety of property and casualty, life and health, employee benefits, investment and risk management products and services. The Company’s shares are listed on both the New York Stock Exchange (NYSE: HBG) and Toronto Stock Exchange (TSX: HBG).

Private Debt Offering

During the second quarter of 2003, the Company completed a private placement of $65 million unsecured senior notes (see note 8). Net proceeds on the sale of the notes were used to pay down $50 million of existing indebtedness and for general corporate purposes which may include future acquisitions.

Initial U.S. Public Offering

In June 2002, the Company completed its initial U.S. public offering (“U.S. IPO”) of 6.9 million common shares at a price of $14 per share. The cash proceeds of the offering, net of issue costs of $8.5 million, were approximately $88.1 million of which approximately $86.0 million was used to repay bank debt, long-term debt and a convertible subordinated debenture during the second quarter of 2002.

Change in reporting currency

The Company’s consolidated financial statements historically have been expressed in Canadian dollars. Effective October 1, 2001, the Company adopted the U.S. dollar as its reporting currency. Comparative financial information has been restated in United States (U.S.) dollars using the translation of convenience method. Accordingly, the financial results for the first nine months of the year ended December 31, 2001 and the entire year ended 2000, were converted from Canadian to U.S. dollars at the exchange rate in effect at September 30, 2001 of one Canadian dollar (C$) to 0.6338 U.S. dollar.

Sale of Old Lyme

Effective June 28, 2001, the Company acquired Kaye Group Inc. (Kaye). Kaye, primarily an insurance broker, also underwrote insurance risks through its subsidiaries Old Lyme Insurance Company of Rhode Island Inc. and Old Lyme Insurance Company, Ltd. (collectively Old Lyme). The Company indicated prior to the effective date of the acquisition that it intended to find a purchaser for the Old Lyme operations as soon as possible after closing.

On May 30, 2002 the Company completed the sale of Old Lyme to Fairfax Inc, a related party, and recorded a non-taxable gain on the sale of $2.6 million. This gain increased 2002 annual basic earnings per share and diluted earnings per share by $0.11 and $0.09, respectively.

2.  Summary of significant accounting policies

These consolidated financial statements of the Company are expressed in United States (U.S.) dollars and have been prepared in accordance with Canadian generally accepted accounting principles (Canadian GAAP). These principles differ in certain respects from U.S. GAAP and to the extent that they affect the Company, the differences are described in note 18 “Reconciliation to U.S. GAAP.” The more significant of the accounting policies are as follows:

Basis of presentation

The consolidated financial statements include the accounts of the Company and all of its subsidiaries. All material inter-company accounts and transactions have been eliminated. Certain reclassifications have been made to prior years’ financial statements to conform to the current year presentation.

ANNUAL REPORT December 31, 2003 HUB INTERNATIONAL LIMITED    45 

Estimates and assumptions

Preparation of the financial statements in conformity with Canadian GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and the reported amount of revenue and expense during the reporting period. The principal estimates used in the preparation of these financial statements are the determination of the provision for cancelled policies relating to revenue renegotiation, the allocation of the purchase price on acquisitions, the valuation of reporting units when testing the recoverability of goodwill and other intangible assets, the estimation of the useful lives of definite life intangible assets, and the measurement of stock based compensation. Actual results could differ from those estimated.

Foreign currency translation

The operations of the Company’s subsidiaries outside of the U.S. are self-sustaining. The assets and liabilities of these subsidiaries as at December 31, 2003 and 2002 were translated to U.S. dollars at the year-end exchange rate. Revenue and expenses for 2003 and 2002 were translated to U.S. dollars at the average exchange rate for the period. Accordingly, the unrealized gains and losses which result from this translation are deferred and included in shareholders’ equity under the caption “Cumulative translation account.”

Revenue Recognition

Commission income and fees, (including commission income related to installment billing arrangements) are recognized as of the effective date of the policy unless information is not available relating to the determination of the client’s policy premiums, in which case commission income and fees related to that policy are recognized when that information becomes available and the revenue can be reasonably determined. Commission income is reported net of sub-broker commission expense. Commission and other adjustments are recorded when they occur and the Company maintains an allowance for estimated policy cancellations and commission returns by applying historical policy cancellation and commission return rates to the current year revenue, adjusted for any known deviations. The Company is entitled to contingent commissions and volume overrides from insurance companies which are recorded in the earlier of the period in which amounts can be reasonably estimated or the period in which the amounts are received. Amounts related to contingent commissions and volume overrides can be reasonably estimated when information pertaining to the calculation, such as premium volumes, loss ratios and expenses, can be obtained from the insurance companies. Other revenue primarily includes investment income, policy service fees and income earned related to the financing of client premiums. Investment income is recorded when earned. Policy service fees are recorded on the effective date of the policy, at which time the service has been provided. Income earned related to the financing of client premiums is recorded when known.

Cash and cash equivalents

Cash and cash equivalents consist of cash, and highly-liquid investments having maturities of three months or less at the acquisition date.

Concentration of credit risk

The Company’s financial instruments that are exposed to concentration of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company maintains cash with banks in excess of federally insured limits and is exposed to the credit risk from this concentration of cash. The Company performs ongoing credit evaluations of its customers financial condition and generally requires no collateral. No single client accounted for more than ten percent of total client premiums nor more than ten percent of revenue for the years ended December 31, 2003, 2002 and 2001, respectively.

In addition, the Company is also party to interest rate swap transactions which are subject to credit risk. Credit risk arises from the possibility that counterparties may default on their obligations to the Company. Derivative contracts generally expose the Company to credit loss if changes in market rates affect a counterparty’s position unfavorably and the counterparty defaults on payment.

  46   HUB INTERNATIONAL LIMITED ANNUAL REPORT December 31, 2003

Trust Cash

Premiums collected (less commissions and other deductions), but not yet remitted to insurance companies, are included in trust cash. Trust cash is restricted as to use by contractual obligations and by laws in certain states and provinces in which the Company operates.

Property and equipment

Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is recorded based on the useful economic lives of the related assets as follows: for computer equipment on a straight-line basis from 3 to 5 years or on a 30% declining balance method; for furniture, fixtures, and office equipment on a straight-line basis from 5 to 7 years or on a 20% declining balance method. Leasehold improvements are amortized on the straight-line method over the term of the related lease. Upon sale or retirement, the cost and related accumulated depreciation or amortization are removed from the accounts and any gain or loss is reflected in earnings. If the carrying value of property and equipment is identifiable as impaired, it is written down to its net recoverable amount.

Business combinations

Acquisitions of subsidiaries have been accounted for using the purchase method, whereby the results of acquired companies are included only from the date of acquisition. Consideration which is contingent on maintaining or achieving specified earnings levels in future periods is recognized as an additional cost of the purchase when the contingency is resolved and the additional consideration is issued or becomes issuable.

Goodwill and other intangible assets

Effective January 1, 2002, the Company adopted the Canadian Institute of Chartered Accountants (CICA) Accounting Standards Board Handbook Section 3062, “Goodwill and Other Intangible Assets” (Section 3062) without restatement of prior periods.

Goodwill and intangible assets with indefinite useful lives are no longer amortized but are subject to impairment tests on at least an annual basis. Goodwill is allocated to reporting units and any potential goodwill impairment is identified by comparing the carrying value of a reporting unit with its fair value. If any potential impairment is indicated, it is quantified by comparing the carrying value of goodwill to its fair value, based on the fair value of the assets and liabilities of the reporting unit.

Intangible assets other than goodwill which do not have indefinite lives are amortized on a straight-line basis over their useful lives. These intangible assets are subject to an annual impairment test comparing carrying values to net recoverable amounts.

The Company completed its impairment testing on the balance of goodwill and intangible assets as of January 1, 2004, 2003 and 2002. Based on the testing performed, no impairment losses were incurred.

No goodwill amortization expense was incurred for the year ended December 31, 2003 and 2002. For the year ended December 31, 2001 the Company incurred goodwill amortization expense of $4,125 before tax and approximately $3,996 after tax ($0.20 per diluted share).

The effect of the adoption of Section 3062 on net earnings and earnings per share for the years ended December 31, 2003, 2002 and 2001 was as follows:

	2003		2002		2001
Reported net earnings	$	36,509	$	29,401	$	10,005
Add back: Goodwill amortization		—		—		3,996
Net earnings adjusted for goodwill	$	36,509	$	29,401	$	14,001
Basic EPS — Reported	$	1.22	$	1.27	$	0.53
Basic EPS — Adjusted for goodwill	$	1.22	$	1.27	$	0.74
Diluted EPS — Reported	$	1.14	$	1.06	$	0.50
Diluted EPS — Adjusted for goodwill	$	1.14	$	1.06	$	0.70

ANNUAL REPORT December 31, 2003 HUB INTERNATIONAL LIMITED    47 

Interest rate swap

The Company accounts for interest rate swaps with respect to its long-term debt using the synthetic instruments method under which the net interest on the swap and associated debt is reported in earnings as if it were a single synthetic financial instrument. The fair value of the derivative is not recognized in the balance sheet.

Guarantees

In February 2003, the CICA issued an accounting guideline on the disclosure of guarantees, which broadens the definition of guarantees and requires substantially expanded disclosure. This new guideline was effective for the Company this year. As this guideline requires disclosure only, there was no impact on the consolidated statements of earnings and retained earnings and consolidated balance sheets. See note 10(b). A guarantee is a contract that contingently requires the guarantor to make payments to a third party based on (i) changes in an underlying interest rate, foreign exchange rate or other variable, including the occurrence or non-occurrence of an event, that is related to an asset, liability or equity security held by the guaranteed party, (ii) an indemnification provided to the third party with the characteristics listed above, (iii) another entity’s failure to perform under an obligating agreement, or (iv) another entity’s failure to perform related to its indebtedness.

Stock based compensation

The Company recognizes the fair value of stock based compensation as an expense over the period in which entitlement to the compensation vests.

Future income taxes

Income taxes reflect the expected future tax consequences of temporary differences between the carrying amounts of assets or liabilities and their tax bases. Future income tax assets and liabilities are determined for each temporary difference based on the tax rates which are expected to be in effect when the asset or liability is settled. The benefit of loss carry forwards is recognized as an asset to the extent that it is more likely than not to be realized.

  48   HUB INTERNATIONAL LIMITED ANNUAL REPORT December 31, 2003

Earnings per share

Basic earnings per share, excluding the dilutive effect of common share equivalents, is calculated by dividing net earnings by the weighted average number of common shares outstanding for the period. Diluted earnings per share is calculated using the treasury stock method and includes the effects of all potentially dilutive securities. Earnings per common share have been calculated as follows:

		2003		2002		2001
Net earnings (numerator)			$36,509		$29,401		$10,005
Effect of dilutive securities:
	Interest on 8.5% subordinated convertible debentures (net of income tax)		1,886		2,520		—
	Cash in lieu of dividends on restricted share units (net of income tax)		111		—		—
Net earnings plus assumed conversions (numerator)			$38,506		$31,921		$10,005
Weighted average shares outstanding — basic (denominator)			29,967		23,181		19,012
Effect of dilutive securities:
	Contingently issuable shares		11		307		—
	Put options		—		2,149		1,093
	Restricted share units		299		—		—
	Stock options		147		—		—
	Retractable shares		133		49		—
	8.5% subordinated convertible debentures		3,210		4,513		—
Weighted average shares outstanding — Diluted (denominator)			33,767		30,199		20,105
Earnings per common share:
	Basic		$1.22		$1.27		$0.53
	Diluted		$1.14		$1.06		$0.50

Put options

The fair value of put options issued by the Company as consideration for businesses acquired is classified as long-term debt until such time as the option is exercised or expires. Changes in the fair value of these options are recorded in earnings. As part of the negotiations of contingent consideration the former owners of certain companies acquired in 2001 agreed to relinquish their rights to put options on 730,000 common shares at December 31, 2003 and on 1,423,000 common shares at December 31, 2002. Accordingly at December 31, 2003 no put options are outstanding on the Company’s common shares.

3.  Acquisitions

The Company’s strategic business plan includes the regular and systematic evaluation and acquisition of insurance brokerages in new and existing markets. Insurance brokerages, due to their nature, typically maintain a very low capital to earnings ratio. As a result, the Company recorded a substantial amount of goodwill and other intangible assets in connection with these acquisitions.

The Company typically pays a portion of the consideration for an acquired brokerage in cash. Consideration for the remainder of the purchase price is normally in the form of the Company’s common shares based on the fair market value of the Company’s common shares as traded on the NYSE or TSX, and is defined and calculated pursuant to the acquisition agreement.

(a) During 2003, the Company acquired 9 insurance brokerages for total consideration of approximately $8,674, of which $8,136 was cash and the remainder of $538 in 32,000 common shares of the Company. These acquisitions were accounted for under the purchase method. The allocation of aggregate purchase prices to the fair value of the assets acquired was as follows: goodwill — $6,389, customer relationships — $1,352, non-competition covenants — $337, current assets — $4,298, capital assets  — $24, current liabilities — $3,726.

ANNUAL REPORT December 31, 2003 HUB INTERNATIONAL LIMITED    49 

Of the goodwill acquired $1,367 is deductible for tax purposes. In addition the Company also recognized $1,800 of goodwill associated with contingent consideration relating to prior year acquisitions.

As part of the negotiations of the contingent consideration for J.P. Flanagan Corporation (“Flanagan”) total additional consideration of 37,500 of our common shares were earned at December 31, 2003 valued at approximately $635, based on the closing price of the shares at December 31, 2003 on the NYSE. The common shares have been recorded as “issuable shares” and included in shareholders’ equity and goodwill has been increased by the same amount at December 31, 2003. Also as part of the negotiations the former owner agreed to relinquish his rights to put options on the 730,000 shares previously issued as well as on shares issued as contingent consideration. In addition we expect to issue non-cash stock based compensation in the form of 84,375 restricted share units in the first quarter of 2004. Half of these restricted share units will vest in 4 years and the balance will vest in 7 years.

(b) During 2002, the Company purchased all of the issued and outstanding shares of Hooper Hayes & Associates, Inc. (Hooper Hayes), and Fifth Third Insurance Services, Inc. which was renamed Hub International of Indiana Limited (Hub Indiana), as well as outstanding shares or net assets of 6 other brokerages, all of which were acquired using the purchase method of accounting. Accordingly, the results of operations and cash flows of the acquired companies have been included in the Company’s consolidated results from their respective acquisition dates.

In accordance with the purchase agreement, the former owners of Burnham Stewart Group, Inc. (Burnham), were entitled to additional consideration based upon certain acquired operations of Burnham achieving 2002 profitability targets. The additional consideration to be issued was a multiple of the final adjusted profitability as of December 31, 2002 for those operations. The total additional consideration was $22,166 of which $8,423 was cash and the remainder of $13,743 in 1,228 common shares of the Company. The Company issued the common shares in March 2003. As of December 31, 2002, the Company had accrued the cash portion of the contingent consideration and the share portion of the contingent consideration had been recorded as “issuable shares” and included in shareholders’ equity. As part of the negotiations of the contingent consideration, the former owners of Burnham agreed to relinquish their rights to put options on all of the 1,423 common shares issued as part of the 2002 acquisition, as well as on shares issued as contingent consideration in exchange for release from escrow provisions on those same common shares. The total additional consideration of $22,794 is shown as an addition to goodwill and customer relationships in the table below.

  50   HUB INTERNATIONAL LIMITED ANNUAL REPORT December 31, 2003

The allocation of the purchase price, including goodwill and other identifiable intangible assets, and the cost of the acquired brokerages in 2002 are summarized as follows:

							Burnham
	Hooper						Contingent
	Hayes			Hub Indiana			Consideration			Other		Total
Acquisition Date	Nov. 1, 2002			Dec. 31, 2002			Dec. 31, 2002			Various
Working capital	$	(1,141	)	$	(289	)	$	(628	)	$	1,180	$	(878	)
Property, equipment and other assets		69			1,312			—			108		1,489
Net assets (liabilities) at fair value	$	(1,072	)	$	1,023		$	(628	)	$	1,288	$	611
Consideration
Cash	$	1,514		$	37,250		$	—		$	12,899	$	51,663
Debt		—			122			8,423			2,365		10,910
Contingently issuable shares		—			—			13,743			—		13,743
Common shares		7,115			—			—			344		7,459
	$	8,629		$	37,372		$	22,166		$	15,608	$	83,775
Goodwill	$	6,209		$	24,622		$	21,096		$	10,704	$	62,631
Customer relationships		3,265			11,727			1,698			3,384		20,074
Non-competition covenants		227			—			—			232		459
	$	9,701		$	36,349		$	22,794		$	14,320	$	83,164
Number of shares issued as consideration (000’s)		449			—			—			24		473
Number of shares issued as contingently issuable consideration (000’s)		—			—			1,228			—		1,228

Of the goodwill acquired, $30,522 is deductible for tax purposes.

(c) During 2001, the Company purchased all of the issued and outstanding shares of Kaye, Burnham and Flanagan, as well as the outstanding shares or net assets of 13 other brokerages, all of which were acquired using the purchase method of accounting. Accordingly, the results of operations and cash flows of the acquired companies have been included in the Company’s consolidated results from their respective acquisition dates.

ANNUAL REPORT December 31, 2003 HUB INTERNATIONAL LIMITED    51 

The allocation of the purchase price, including goodwill and other identifiable intangible assets, and the cost of the acquired brokerages in 2001 are summarized as follows:

	Kaye			Burnham			Flanagan			Others			Total
Acquisition Date		June 28, 2001			July 1, 2001			May 31, 2001			Various
Working capital	$	43,141		$	3,002		$	(703	)	$	(216	)	$	45,224
Property, equipment and other assets		7,413			1,580			79			(244	)		8,828
Long-term debt and capital leases assumed		(1,449	)		(8,200	)		(1,339	)		(70	)		(11,058	)
Net assets (liabilities), at fair value	$	49,105		$	(3,618	)	$	(1,963	)	$	(530	)	$	42,994
Consideration
Cash	$	125,131		$	11,533		$	776		$	3,950		$	141,390
Debt		—			12,435			7,210			1,760			21,405
Common shares		—			6,191			1,821			557			8,569
	$	125,131		$	30,159		$	9,807		$	6,267		$	171,364
Goodwill	$	59,816		$	27,269		$	8,838		$	6,001		$	101,924
Customer relationships		12,992			5,690			2,242			796			21,720
Trademarks		1,714			623			250			—			2,587
Non-competition covenants		1,204			195			440			—			1,839
	$	75,726		$	33,777		$	11,770		$	6,797		$	128,070
Number of shares issued as consideration (000’s)		—			1,743			730			51			2,524

Contingent consideration

In addition to the consideration shown above, the previous owners of certain other acquisitions are entitled to contingent consideration if certain revenue or profitability targets are met. See note 10 “Commitments and contingencies.”

4. Accounts and other receivables

Accounts and other receivables consist of the following:

	December 31,
	2003			2002
Client premiums receivable	$	138,494		$	112,008
Commissions receivable		22,228			21,739
Less: Allowance for doubtful accounts		(1,086	)		(714	)
Less: Allowance for policy cancellations		(1,343	)		(875	)
		158,293			132,158
Other receivables		5,435			4,415
	$	163,728		$	136,573

  52   HUB INTERNATIONAL LIMITED ANNUAL REPORT December 31, 2003

Allowance for doubtful accounts:

	2003			2002			2001
Balance, January 1	$	714		$	815		$	502
Charged to net earnings before income taxes		1,057			233			305
Deductions of amounts previously charged to the provision		(810	)		(335	)		(247	)
Acquired through acquisitions		125			1			255
Balance, December 31	$	1,086		$	714		$	815

Losses relating to the non-collection of client premium receivables, may be mitigated by cancellation of the underlying insurance policy.

5.  Intangible assets

As of December 31, 2003 and 2002 the gross carrying amount and accumulated amortization of intangible assets other than goodwill were as follows:

		As of December 31, 2003						As of December 31, 2002
		Gross						Gross
		Carrying		Accumulated				Carrying		Accumulated
		Amount		Amortization		Total		Amount		Amortization		Total
Definite life intangible assets:
	Customer relationships	$	43,422	$	5,480	$	37,942	$	41,762	$	2,383	$	39,379
	Non-competition covenants		476		269		207		158		100		58
	Trademarks		2,587		—		2,587		—		—		—
			46,485		5,749		40,736		41,920		2,483		39,437
Indefinite life intangible assets:
	Non-competition covenants		2,167		—		2,167		2,140		—		2,140
	Trademarks		—		—		—		2,587		—		2,587
			2,167		—		2,167		4,727		—		4,727
Total		$	48,652	$	5,749	$	42,903	$	46,647	$	2,483	$	44,164

Additions during 2003 and 2002 were as follows:

		2003		2002
Definite life intangible assets:
	Customer relationships	$	1,602	$	20,074
	Non-competition covenants		206		—
			1,808		20,074
Indefinite life intangible assets:
	Non-competition covenants		136		459
Total		$	1,944	$	20,533

The Company is unable to estimate the useful life of certain non-competition covenants. These indefinite life intangible assets will be reviewed annually for impairment. Once a non-competition covenant is triggered, following the employee leaving the Company, the Company’s policy is to amortize the related intangible asset over the period of the remaining contractual obligation.

ANNUAL REPORT December 31, 2003 HUB INTERNATIONAL LIMITED    53 

The changes in the carrying amount of goodwill for the years ended December 31, 2003 and 2002, are as follows:

	Operations			Operations
	in Canada			in U.S.			Total
Balance as of December 31, 2001	$	74,282		$	146,566		$	220,848
Goodwill acquired during 2002		2,341			60,265			62,606
Goodwill disposed during 2002		(2,054	)		(505	)		(2,559	)
Cumulative translation adjustment		817			—			817
Balance as of December 31, 2002		75,386			206,326			281,712
Goodwill acquired during 2003		535			7,654			8,189
Goodwill disposed during 2003		(478	)		(197	)		(675	)
Cumulative translation adjustment		16,636			—			16,636
Balance as of December 31, 2003	$	92,079		$	213,783		$	305,862

For the years ended December 31, 2003, 2002 and 2001, amortization has been comprised of the following:

	2003		2002		2001
Customer relationships	$	3,040	$	1,627	$	759
Non-competition covenants		168		44		56
Goodwill		—		—		4,125
Total	$	3,208	$	1,671	$	4,940

The Company estimates the amortization charges for 2004 through 2008 for all acquisitions consummated to date will be:

Year ended December 31,	2004		2005		2006		2007		2008
Customer relationships	$	3,089	$	3,089	$	3,089	$	3,072	$	3,068
Non-competition covenants		63		44		82		80		21
Trademarks		2,587		—		—		—		—
Total	$	5,739	$	3,133	$	3,171	$	3,152	$	3,089

6.  Property and equipment

	2003						2002
			Accumulated		Net Book				Accumulated		Net Book
	Cost		Depreciation		Value		Cost		Depreciation		Value
Leasehold improvements	$	10,522	$	3,419	$	7,103	$	9,749	$	2,015	$	7,734
Office equipment		15,416		8,357		7,059		12,190		5,939		6,251
Computer equipment		24,998		14,979		10,019		17,530		10,217		7,313
	$	50,936	$	26,755	$	24,181	$	39,469	$	18,171	$	21,298

Included in computer equipment is computer software with a net book value of $5,137 and $2,641 at December 31, 2003 and 2002, respectively. Depreciation expense of $1,538, $1,087 and $621 was charged against these assets for the years ended December 31, 2003, 2002 and 2001, respectively.

During 2003 and 2002, property and equipment were acquired at an aggregate cost of $8,272 and $4,494, respectively, of which $2,147 and $25, respectively, were acquired by means of capital leases and other financing.

  54   HUB INTERNATIONAL LIMITED ANNUAL REPORT December 31, 2003

The cost above reflects certain property and equipment held under capital leases of which the remaining liability at December 31, 2003 and 2002 was $650 and $993, respectively.

7.  Accounts payable and accrued liabilities

Accounts payable and accrued liabilities consist of the following:

	December 31,
	2003		2002
Insurance premiums payable	$	176,211	$	150,929
Other accounts payable and accrued liabilities		49,957		36,105
	$	226,168	$	187,034

8.  Debt

	December 31,
	2003			2002
Series A Senior Notes, with interest at 5.71%(1)	$	10,000		$	—
Series B Senior Notes, with interest at 6.16%(1)		55,000			—
Revolving U.S. Dollar LIBOR loan(2)		—			50,000
Put options(3)		—			5,940
Term loan, interest only at 10%, due February 2007(4)		7,500			7,500
Various other unsecured notes payable and debt(5)		5,649			7,605
Capital leases(5)		650			993
Long-term debt and capital leases		78,799			72,038
Less current portion		(3,362	)		(3,029	)
	$	75,437		$	69,009

Future repayments of long-term debt and capital leases are as follows:

For the twelve months ending December 31,
2004	$	3,362
2005		1,745
2006		919
2007		7,641
2008		3,333
2009 and thereafter		61,799
	$	78,799

(1)  Senior Notes — In June 2003, the Company, completed a private placement of $65 million in principal amount of unsecured senior notes. The senior notes were issued in two series. Series A represents $10 million of 5.71% senior notes with interest due semi-annually, and principal of $3,333 due annually, June 15, 2008 through June 15, 2010. Series B represents $55 million of 6.16% senior notes with interest due semi-annually, and principal of $11,000 due annually June 15, 2009 through June 15, 2013. The senior notes were sold on a private basis in the United States to institutional accredited investors. Net proceeds of the sale of the senior notes were used to pay down $50 million of the Company’s revolving U.S. Dollar LIBOR Loan with the balance held for general corporate purposes, which may include future acquisitions. The Company incurred approximately $0.7 million in fees and expenses related to the offering of these notes, which were capitalized and are being amortized to expense over the term of the notes. At December 31, 2003, $65 million was outstanding under these senior notes. The Company is in compliance with all financial covenants governing these notes.

ANNUAL REPORT December 31, 2003 HUB INTERNATIONAL LIMITED    55 

On July 16, 2003, the Company entered into an interest rate swap agreement. The effect of the swap is to convert the fixed rate interest payments of 5.71% and 6.16% on $10 million and $55 million, respectively, of the senior notes in order to ensure that the Company pays a market related interest rate on a portion of its borrowings. As at December 31, 2003, the Company estimated the fair value of the swap to be $2.6 million, which is not recognized in these financial statements. Accordingly, $2.6 million is the estimated amount that the Company would need to pay to terminate the swap as of December 31, 2003.

(2)	Revolving U.S. dollar LIBOR loan — This undrawn facility was renegotiated in December 2003, subject to completion of the definitive amended agreement. Under the new terms, the unsecured facility totals $50 million, bears interest at a floating rate of prime plus 1% or 112.5 basis points above LIBOR, which were 1.12% and 1.42% at December 31, 2003 and 2002, respectively. The facility is available on a revolving basis for one year and expires on December 13, 2004; however if the revolving period is not extended, the Company may convert the outstanding balance under the facility to a three year non-revolving term loan repayable at the end of three years with an interest rate of 137.5 basis points above the Canadian dollar interest swap rate. An annual commitment fee of 20 basis points is assessed on the unused balance. Borrowings under this facility totaled $NIL and $50 million at December 31, 2003 and 2002, respectively. The Company was in compliance with all financial covenants governing this facility as of December 31, 2003 and 2002.
(3)	Put Options — as discussed in note 3(a), the former owner of Flanagan has relinquished his right to put options on 730,000 commons shares of the Company. Accordingly, an amount of $5,940, previously classified as long-term debt, has been reclassed as share capital (see note 11).
(4)	This term loan is from an insurance carrier. The terms of the loan provide for an incentive arrangement whereby a credit can be earned that will reduce annual interest payments under the loan (based on target premiums placed with the carrier) which reduces the principal repayment due in February 2007 (based on both target premiums placed with the carrier as well as the loss ratio on premiums placed with the carrier). Under this incentive arrangement, both the annual interest payments as well as the principal payment can be reduced to zero. Credits were earned for 2003 and 2002 which reduced interest payments to zero from $750 and $229, respectively.
(5)	Certain property and equipment have been pledged as collateral in amounts not less than the outstanding balance of the loan at December 31, 2003 and December 31, 2002, respectively.

Demand U.S. dollar base rate loan

The Company has an undrawn $9.3 million facility which expires on July 18, 2004 and bears interest at the bank’s U.S. base rate plus 50 basis points. Borrowings on the facility are repayable on demand.

Subordinated convertible debentures

In connection with the acquisition of Kaye on June 28, 2001, the Company issued $35 million aggregate principal amount, 8.5% convertible subordinated debentures (the Fairfax notes) due June 28, 2007 to certain subsidiaries of Fairfax Financial Holdings Limited (Fairfax). The Fairfax notes are convertible by the holders at any time into the Company’s common shares at C$17.00 per share. Beginning June 28, 2006, the Company may require conversion of the Fairfax notes into common shares at C$17.00 per share if, at any time, the weighted average closing price of the Company’s common shares on the TSX for twenty consecutive trading days equals or exceeds C$19.00 per share. If converted, Fairfax would have owned approximately 32% of the Company’s outstanding common shares as of December 31, 2003.

9.  Defined Contribution Plan

Substantially all officers and employees of the Company in the United States are entitled to participate in a qualified retirement savings plan (defined contribution plan). The cost to the Company was $1,781, $1,425, and $648 for 2003, 2002 and 2001 respectively. Subsequent to year-end a defined contribution plan was put in place for Canadian employees.

  56   HUB INTERNATIONAL LIMITED ANNUAL REPORT December 31, 2003

10. Commitments and contingencies

(a) The Company is committed under lease agreements for office premises and computer equipment. At December 31, 2003, aggregate minimum rental commitments (net of expected sub-lease receipts) under operating leases are as follows:

2004	$	10,963
2005		10,010
2006		8,927
2007		7,734
2008		6,519
2009 and thereafter		17,340
	$	61,493

Rent expense for the year ended December 31, 2003, 2002, and 2001 amounted to $11,503, $9,684 and $7,665 respectively, net of sublease rental income of $1,282, $737 and $620 respectively.

(b) In connection with the Company’s executive share purchase plan, under certain circumstances, the Company may be obligated to purchase loans for officers, directors and employees from a Canadian chartered bank totaling $4,513 and $5,077 as of December 31, 2003 and 2002 respectively, to assist in purchasing common shares of the Company. The Company no longer makes loans to its executive officers and directors. As collateral, the employees have pledged 478,000 and 602,000 common shares as of December 31, 2003 and 2002, respectively, which have a market value of $8,105 and $7,677 as of December 31, 2003 and 2002, respectively. Interest on the loans in the amount of $279, $264 and $377 for the years ended December 31, 2003, 2002 and 2001, respectively, was paid by the Company and is included in compensation expense.

(c) On December 24, 2003 executive management profitability bonuses were restructured. Under the new agreement, the stock option component of the annual bonus was eliminated in exchange for restricted share units to be issued in the first quarter of 2004. Management has estimated that approximately $16.9 million of restricted share units will be issued. These restricted share units will all vest on January 1, 2011 subject to continued employment. Hub’s policy is to expense the fair value of non-cash stock based compensation evenly over the period they are earned. Non-cash stock based compensation expense related to the 2003 bonuses was $1,405 and is included in non-cash stock based compensation.

(d) In connection with the acquisition of Hooper Hayes and Associates, Inc., in 2002 the Company issued 196,000 shares (the “Retractable Shares”) that are being held in escrow subject to release over a period of three years upon the satisfaction of certain performance targets. As of December 31, 2003, 63,000 shares have been released from escrow.

As part of the negotiations of the contingent consideration for J.P. Flanagan Corporation (“Flanagan”) total additional consideration of 37,500 of our common shares were earned at December 31, 2003 valued at approximately $635, based on the closing price of the shares at December 31, 2003 on the NYSE. The common shares have been recorded as “issuable shares” and included in shareholders’ equity and goodwill has been increased by the same amount at December 31, 2003. Also as part of the negotiations the former owner agreed to relinquish his rights to put options on the 730,000 shares previously issued as well as on shares issued as contingent consideration. In addition we expect to issue non-cash stock based compensation in the form of 84,375 restricted share units in the first quarter of 2004. Half of these restricted share units will vest in 4 years and the balance will vest in 7 years.

In connection with other various acquisitions completed through December 31, 2003, the Company may be obligated to pay contingent consideration up to a maximum sum of approximately $8.2 million cash and $0.2 million in common shares based upon the acquired brokerages achieving certain targets. The contingent payments are payable on various dates through September, 2006 according to the terms and conditions of each purchase agreement. Any additional consideration will be recorded as an adjustment to goodwill once the contingency is resolved. In connection with contingent consideration earned as at December 31, 2003, the

ANNUAL REPORT December 31, 2003 HUB INTERNATIONAL LIMITED    57 

financial statements reflect a liability to pay cash of $71 and to issue common shares valued at approximately $635 as of December 31, 2003.

(e) In the ordinary course of business, the Company and its subsidiaries are subject to various claims and lawsuits consisting primarily of alleged errors and omissions in connection with the placement of insurance. In the opinion of management, the ultimate resolution of all asserted and potential claims and lawsuits will not have a material adverse effect on the consolidated financial position or results of operations of the Company.

11. Shareholders’ equity

Share capital

At December 31, 2003 and 2002, there were an unlimited number of non-voting, preferred shares authorized, issuable in series on such terms and conditions as set by the Board of Directors, of which no shares were issued. At December 31, 2003 and 2002, there were an unlimited number of common shares authorized, of which 30,143 and 29,025 were issued and outstanding as at December 31, 2003 and December 31, 2002 respectively.

	Common shares
	Outstanding
	(000’s)			Amount
Balance, December 31, 2000		18,528		$	111,430
Issued for cash		440			3,621
Issued for executive stock purchase plan (net of repurchases)		164			1,886
Purchase of subsidiaries		2,474			8,091
Issuable for contingent consideration		50			478
Balance, December 31, 2001		21,656			125,506
Issued — U.S. IPO		6,900			90,616
Issued for executive stock purchase plan (net of repurchases)		(4	)		(152	)
Release of put option liability		—			11,768
Purchase of subsidiaries		473			7,459
Balance, December 31, 2002		29,025			235,197
Purchase of subsidiaries		32			538
Repurchases of executive share purchase plan shares		(7	)		(66	)
Share issue costs, net of future tax asset		—			(61	)
Shares issued for contingent consideration		1,246			14,041
Cancellation of shares		(8	)		(91	)
Restricted share units released		7			112
Stock options exercised		1			14
Reclassification of executive share purchase plan loans		(153	)		(1,918	)
Release of put option liability		—			7,079
Balance, December 31, 2003		30,143		$	254,845

  58   HUB INTERNATIONAL LIMITED ANNUAL REPORT December 31, 2003

Issuable shares

	Common Shares
	(000’s)			Amount
Balance, December 31, 2001		—		$	—
Issuable for contingent consideration		1,228			13,743
Balance, December 31, 2002		1,228			13,743
Issued		(1,228	)		(13,743	)
Issuable for contingent consideration		43			721
Balance, December 31, 2003		43		$	721

Contributed surplus

	2003		2002		2001
Balance at December 31,	$	1,234	$	—	$	—
Non-cash stock based compensation		3,284		1,082		—
Other		288		152		—
Balance at December 31	$	4,806	$	1,234	$	—

Cumulative translation account

	2003			2002			2001
Balance at December 31,	$	2,185		$	2,770		$	195
Translation of self-sustaining foreign operations		19,553			(269	)		9,479
Translation of debt financing of self-sustaining foreign operations		(1,676	)		(316	)		(6,904	)
Balance at December 31	$	20,062		$	2,185		$	2,770

12. Equity Incentive Plan

On February 28, 2003, the Company issued options exercisable for 267,000 common shares at an exercise price of $13.79 per share, the U.S. dollar equivalent of the closing sales price of the Company’s common shares on the TSX on that date. The maximum option term is seven years, and the options vest as to one-third per year over three years of continuous employment. The number of common shares that may be issued under the Equity Incentive Plan is limited to 3,631,820 common shares.

A summary of the stock option activity and related information for the years ended December 31, 2003 and 2002 consists of the following (no stock options were issued prior to 2002):

	Number			Weighted-Average
	(000’s)			Exercise Price
Balance, December 31, 2001		—		$	—
Granted		1,270		$	15.67
Exercised		—		$	—
Forfeited		—		$	—
Balance, December 31, 2002		1,270		$	15.67
Granted		268		$	13.79
Exercised		(1	)	$	15.67
Forfeited		(39	)	$	15.67
Balance, December 31, 2003		1,498		$	15.64

ANNUAL REPORT December 31, 2003 HUB INTERNATIONAL LIMITED    59 

The following table summarizes information about the stock options outstanding at December 31, 2003 and 2002:

	2003						2002
	Number		Weighted-average		Number		Number		Weighted-average		Number
	Outstanding		Remaining		Exercisable		Outstanding		Remaining		Exercisable
Exercise price	(000’s)		Contractual life		(000’s)		(000’s)		Contractual life		(000’s)
$15.67		1,230		5.43 years		417		1,270		6.45 years		—
$13.79		268		6.08 years		6		—				—
		1,498		5.55 years		423		1,270		6.45 years		—

The fair value of the stock options granted in 2003 was approximately $1.2 million (weighted average exercise price was $13.79 per share). The aggregate fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions for the options issued in 2003:

	2003		2002
Dividend yield		2.00%		1.15%
Expected volatility		40.1%		30.0%
Risk free interest rate		2.90%		4.14%
Expected life		5 years		5 years

Non-cash stock based compensation related to stock options of $2,309 and $1,089 for the year ended December 31, 2003 and 2002, respectively, was expensed with offsetting credits to contributed surplus.

Shares derived from the options are held in escrow and subject to transfer restrictions for the period of five years from the date the options are granted, subject to early release in certain circumstances.

On June 30, 2003, the Company awarded 605,000 restricted share units to employees of the Company. The restricted share units are exercisable for common shares without payment of cash consideration and vest over periods ranging from 68 months to 95 months. In addition, in December 2003, the Company agreed to award approximately $16.9 million of restricted share units in connection with the restructure of executive management profitability bonuses — see note 10(c).

Non-cash stock based compensation for the year ended December 31, 2003 and 2002 is comprised of the following:

		2003		2002
Non-cash stock based compensation:
	Stock options granted June 2002	$	1,899	$	1,089
	Stock options granted February 2003		410		—
	Restricted share units related to 2003 bonuses (see note 10(c))		1,405		—
	Restricted share units		1,087		—
		$	4,801	$	1,089

13. Fair value of financial instruments

The carrying amounts of the Company’s financial assets and liabilities, including cash and cash equivalents, accounts and other receivables, accounts payable and accrued liabilities at December 31, 2003 and 2002, approximate fair value because of the short -term nature of these instruments. The carrying value of the Company’s variable rate debt at December 31, 2003 and 2002, of $385 and $50,587 respectively, approximates fair market value.

In connection with the acquisition of Kaye in 2001, the Company issued 8.5% subordinated convertible debentures due June 28, 2007 with a carrying amount and aggregate principal of $35 million. These debentures remain

  60   HUB INTERNATIONAL LIMITED ANNUAL REPORT December 31, 2003

outstanding at December 31, 2003. The Company believes it is not practicable to estimate the fair value of its subordinated convertible debentures due to the conversion features.

The carrying values of long-term debt approximate fair values.

14. Income taxes

Income taxes for 2003, 2002 and 2001, amounted to $18.9 million, $14.3 million and $5.3 million, respectively, resulting in an effective tax rate of 34%, 33% and 34% in 2003, 2002, and 2001, respectively.

The provision for income tax expense differs from the result that would have been obtained by applying the combined Canadian statutory federal and provincial income tax rate of 36.62%, 38.62% and 41.7% in 2003, 2002 and 2001, respectively, as follows:

	2003			2002			2001
Provision for tax at statutory rates	$	20,270		$	16,852		$	6,366
Income earned outside of Canada		(1,688	)		(2,036	)		(3,170	)
Non-taxable life insurance proceeds		(366	)		—			—
Non-taxable gain on sale of Old Lyme		—			(1,009	)		—
Non-deductible amortization of goodwill		—			—			1,579
Other		626			449			487
Provision for tax	$	18,842		$	14,256		$	5,262

The components of the future tax assets and liabilities at December 31, 2003 and 2002, were as follows:

		2003			2002
Future income tax assets
	Loss carryforwards	$	2,895		$	2,235
	IPO costs		2,003			2,182
	Non-deductible book reserves		2,211			1,767
	Non-cash stock based compensation		1,633			285
	Other		581			570
Total future income tax assets			9,323			7,039
Less: current portion future income tax assets			(2,865	)		(3,324	)
Future income tax assets		$	6,458		$	3,715
Future income tax liabilities
	Goodwill and other intangible asset amortization	$	9,504		$	6,261
	Unrealized foreign currency gains on long-term debt		1,744			—
	Other accrual adjustments		1,373			1,012
	Property and equipment depreciation		1,335			391
	Other		86			1,245
Total future income tax liabilities			14,042			8,909
Less: current portion future income tax liabilities			(114	)		(1,164	)
Future income tax liabilities		$	13,928		$	7,745

The Company has net operating loss carryforwards of $13,970 at December 31, 2003 that expire 2008 through 2010 resulting in a future tax asset of $2,724. In addition, the Company has state net operating loss carryforwards in the U.S. of approximately $3,610 which expire 2019 through 2023 resulting in a future tax asset of $171. Such net operating losses are currently available to offset certain future state and local taxable income.

ANNUAL REPORT December 31, 2003 HUB INTERNATIONAL LIMITED    61 

15. Interest and income taxes paid

Interest and income taxes paid for the years ending December 31 were:

	2003		2002		2001
Interest paid	$	5,731	$	7,714	$	6,818
Income taxes paid	$	21,007	$	13,124	$	3,444

16. Segmented information

The Company is an international insurance brokerage, which provides a variety of property, casualty, life and health, employee benefits, investment and risk management products and services. In addition to its Corporate Operations, the Company has identified two operating segments within its insurance brokerage business: Canadian Operations and U.S. Operations. Corporate Operations consist primarily of investment income, unallocated administrative costs, interest expense and the income tax expense or benefit which is not allocated to the Company’s operating segments. The elimination of intra-segment revenue relates to intra-company interest charges, management fees and dividends.

  62   HUB INTERNATIONAL LIMITED ANNUAL REPORT December 31, 2003

Geographic revenue is determined based upon the functional currency of the various subsidiaries. Financial information by operating and geographic segment for 2003, 2002 and 2001 is as follows:

	2003									2002
	Canada			U.S.			Consolidated			Canada			U.S.			Consolidated
Revenue
Brokerage	$	109,238		$	177,487		$	286,725		$	85,761		$	134,249		$	220,010
Corporate		20,331			1,803			22,134			19,758			54,183			73,941
Elimination of intra-segment revenue		(20,429	)		(2,071	)		(22,500	)		(19,708	)		(54,283	)		(73,991	)
	$	109,140		$	177,219		$	286,359		$	85,811		$	134,149		$	219,960
Net earnings (loss) before income taxes
Brokerage	$	17,600		$	43,105		$	60,705		$	10,688		$	38,229		$	48,917
Corporate		6,771			(12,125	)		(5,354	)		8,879			(14,139	)		(5,260	)
	$	24,371		$	30,980		$	55,351		$	19,567		$	24,090		$	43,657
Income tax expense (benefit) — current
Brokerage	$	7,020		$	14,302		$	21,322		$	4,472		$	11,871		$	16,343
Corporate		209			(4,609	)		(4,400	)		778			(4,270	)		(3,492	)
	$	7,229		$	9,693		$	16,922		$	5,250		$	7,601		$	12,851
Income tax expense (benefit) — future
Brokerage	$	(355	)	$	2,876		$	2,521		$	(408	)	$	2,280		$	1,872
Corporate		(883	)		282			(601	)		(18	)		(449	)		(467	)
	$	(1,238	)	$	3,158		$	1,920		$	(426	)	$	1,831		$	1,405
Net earnings (loss)
Brokerage	$	10,935		$	25,927		$	36,862		$	6,624		$	24,078		$	30,702
Corporate		7,445			(7,798	)		(353	)		8,119			(9,420	)		(1,301	)
	$	18,380		$	18,129		$	36,509		$	14,743		$	14,658		$	29,401
Identifiable assets
Brokerage	$	176,653		$	442,517		$	619,170		$	132,142		$	412,379		$	544,521
Corporate		65,316			16,117			81,433			28,920			23,435			52,355
	$	241,969		$	458,634		$	700,603		$	161,062		$	435,814		$	596,876
Amortization of intangible assets	$	75		$	3,133		$	3,208		$	36		$	1,635		$	1,671
Additions to property and equipment	$	2,942		$	5,185		$	8,127		$	2,370		$	2,124		$	4,494
Depreciation	$	2,350		$	3,894		$	6,244		$	1,823		$	3,669		$	5,492
Interest income	$	914		$	735		$	1,649		$	683		$	1,070		$	1,753
Interest expense	$	4,752		$	439		$	5,191		$	6,416		$	901		$	7,317

ANNUAL REPORT December 31, 2003 HUB INTERNATIONAL LIMITED    63 

	2001
	Canada			U.S.			Consolidated
Revenue
Brokerage	$	78,488		$	75,458		$	153,946
Corporate		16,960			237			17,197
Elimination of intra-segment revenue		(16,884	)		(266	)		(17,150	)
	$	78,564		$	75,429		$	153,993
Net earnings (loss) before income taxes
Brokerage	$	6,625		$	13,200		$	19,825
Corporate		6,126			(10,684	)		(4,558	)
	$	12,751		$	2,516		$	15,267
Income tax expense (benefit) — current
Brokerage	$	4,044		$	4,929		$	8,973
Corporate		320			(4,326	)		(4,006	)
	$	4,364		$	603		$	4,967
Income tax expense (benefit) — future
Brokerage	$	(134	)	$	864		$	730
Corporate		(642	)		207			(435	)
	$	(776	)	$	1,071		$	295
Net earnings (loss)
Brokerage	$	2,715		$	7,407		$	10,122
Corporate		6,448			(6,565	)		(117	)
	$	9,163		$	842		$	10,005
Identifiable assets
Brokerage	$	109,896		$	319,989		$	429,885
Investment held for sale		—			40,772			40,772
Corporate		28,212			3,427			31,639
	$	138,108		$	364,188		$	502,296
Amortization of goodwill and intangible assets	$	2,316		$	2,624		$	4,940
Additions to property and equipment	$	1,624		$	9,910		$	11,534
Depreciation	$	1,755		$	2,185		$	3,940
Interest income	$	805		$	1,188		$	1,993
Interest expense	$	6,337		$	1,110		$	7,447

17. Related party transactions

The Company had transactions with, and recorded revenue from, the following related parties:

	2003		2002		2001
Northbridge Financial Corporation	$	18,504	$	12,787	$	9,761
Crum & Forster Holdings, Inc.		1,259		914		1,039
Fairfax Inc		8,411		6,278		—
	$	28,174	$	19,979	$	10,800

As of December 31, 2003 and 2002, the Company had accounts receivable and accounts payable balances with the above related parties in the amounts of $3,185 and $17,999, for 2003, respectively, and $2,104 and $12,180 for 2002, respectively. All revenue and related accounts receivable and accounts payable are the result of transactions in

  64   HUB INTERNATIONAL LIMITED ANNUAL REPORT December 31, 2003

the normal course of business. The companies above are related through common ownership by Fairfax, which owns approximately 26% of the Company’s common shares as of December 31, 2003.

As of December 31, 2003 and 2002, long-term debt related to put options of $NIL and $5,940, respectively, and subordinated convertible debentures of $35,000 at the end of both years, are due to related parties.

During 2003, 2002 and 2001, the Company incurred expenses related to rental of premises from related parties in the amount of $2,102, $1,691 and $1,373, respectively. At December 31, 2003 and 2002, the Company also had accounts receivable due from related parties in the amount of $3,530 and $3,801, respectively, of which the majority were loans to employees to enable them to purchase shares of the Company. Of these accounts receivable, as of December 31, 2003 and 2002, $1,918 and $2,207, respectively, were related to Company loans to employees to purchase shares under the executive share purchase plan. As collateral, the employees have pledged 153,000 and 177,000 common shares as of December 31, 2003 and 2002, respectively, which have a market value of $2,590 and $2,263 as of December 31, 2003 and 2002, respectively.

18. Reconciliation to U.S. GAAP

The consolidated financial statements have been prepared in accordance with Canadian GAAP, which differs in certain respects from U.S. GAAP.

Net earnings and comprehensive income

The table below presents the differences between Canadian and U.S. GAAP affecting net earnings and comprehensive income for the years ending December 31, 2003, 2002 and 2001.

		2003			2002			2001
Net earnings for the year based on Canadian GAAP		$	36,509		$	29,401		$	10,005
Adjustment to investment held for sale(1)			—			(2,236	)		520
Change in reporting currency(2)			—			—			144
Cumulative effect of change in accounting policy for put options(3)			335			—			—
Adjustment to put option liability(3)			(409	)		(814	)		(811	)
Net earnings for the year based on U.S. GAAP(4)			36,435			26,351			9,858
Other comprehensive income:(5)
	Unrealized gains (losses) net of tax of $(38) — 2003, $50 — 2002, $120 — 2001		62			(81	)		(195	)
	Reclassification adjustment, net of tax of $48 — 2003, $(85) — 2002, $88 — 2001,		(78	)		138			(143	)
	Foreign currency translation adjustment		17,877			(585	)		(3,792	)
Comprehensive income based on U.S. GAAP(5)		$	54,296		$	25,823		$	5,728
Basic earnings per share based on U.S. GAAP		$	1.22		$	1.14		$	0.52
Diluted earnings per share based on U.S. GAAP		$	1.14		$	0.96		$	0.49

ANNUAL REPORT December 31, 2003 HUB INTERNATIONAL LIMITED    65 

Shareholders’ equity

The table below sets out the differences between Canadian GAAP and U.S. GAAP that affect shareholders’ equity at December 31, 2003 and 2002:

		2003			2002
Shareholders’ equity based on Canadian GAAP		$	342,790		$	284,274
Adjustment to investment held for sale(1)			(1,716	)		(1,716	)
Accumulated other comprehensive income:
	Unrealized gains (losses), net of tax of $(56) — 2003, $51 — 2002		90			(83	)
Cumulative translation account(2)			—			496
Adjustment to put option liability(3)			—			(1,702	)
Executive share purchase plan loans			—			(1,912	)
Shareholders’ equity based on U.S. GAAP(4)		$	341,164		$	279,357

Notes:

(1) Under Canadian GAAP, Old Lyme was recorded as an investment held for sale at its cost, which was equivalent to its fair value, of $40,938 on June 28, 2001. No further adjustments were made to the carrying value of the investment until Old Lyme was sold on May 30, 2002, when the Company recorded a gain of $2,613, equal to the difference between the sale proceeds (which were agreed to be its net asset value under U.S. GAAP as of December 31, 2001 plus interest at 4% per annum from December 31, 2001 until closing) and its carrying value. Interest on debt financing the purchase of Old Lyme was charged to income as it accrued.

Under U.S. GAAP, Old Lyme was recorded as an investment held for sale at its fair value of $40,938. Between acquisition and completion of the sale the carrying value of the investment was adjusted for increases in fair value due to changes in its U.S. GAAP net asset value and interest accretion. Such adjustments were reflected as changes in goodwill arising on the Kaye acquisition. Interest on debt financing the purchase of Old Lyme was debited to the carrying value of the investment and did not impact earnings. The difference between the carrying value of the investment as of the date of completion of the sale and the sale proceeds was reflected as an adjustment to goodwill arising on the Kaye acquisition and accordingly no gain or loss was recorded in income.

The impact of the above noted Canadian and U.S. GAAP differences on earnings were as follows:

	2003		2002			2001
Gain recognized under Canadian GAAP not recorded under U.S. GAAP	$	—	$	(2,613	)	$	—
Interest charged to earnings under Canadian GAAP not charged to earnings under U.S. GAAP		—		377			520
	$	—	$	(2,236	)	$	520

(2) Under U.S. GAAP, historical financial statements are translated using a different exchange rate, which: for assets and liabilities is the exchange rate at the balance sheet date; for the income statement is the average exchange rate for the period; and for the share capital accounts is the historical exchange rate.

The aggregate impact of these differences has been presented in the reconciliation of shareholders’ equity for Canadian to U.S. GAAP under the caption “cumulative translation account.”

(3) Under Canadian GAAP, the fair value of the put options (determined using the Black-Scholes model) issued in connection with certain 2001 acquisitions was allocated to equity instruments on the balance sheet. The balance of the purchase price was allocated to debt. Changes in the value of the put options in periods subsequent to the acquisition date are included in earnings. Under U.S. GAAP prior to July 1, 2003, the fair value of the share consideration and the attached put options was initially recorded in equity and the redemption value of the shares to which the put options are attached was reclassified as mezzanine equity

  66   HUB INTERNATIONAL LIMITED ANNUAL REPORT December 31, 2003

outside of shareholders’ equity as a result of the put options granted on those shares to certain of the selling shareholders. On July 1, 2003, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This Statement requires that an issuer classify financial instruments meeting certain criteria as liabilities (or assets in some circumstances) rather than equity. As a result of the adoption of this new standard, the Company changed its accounting policy with respect to the financial instruments issued in connection with certain 2001 acquisitions. Effective July 1, 2003, the Company remeasured the fair value of the put options (using the Black-Scholes model) and classified this amount as liability. Amounts previously classified as mezzanine equity were reclassified as shareholders’ equity. The difference between the estimated fair value of the put options as at July 1, 2003 and May 31, 2001 was reported as a cumulative adjustment to net earnings under U.S. GAAP. Comparative financial statements were not restated. Under U.S. GAAP, changes in the estimated fair value of the put options are included in earnings.

Also under U.S. GAAP, the fair value of the put options at the date of issuance was also recorded as a debit and credit to shareholders’ equity, representing an unearned compensation expense, as the put options require the selling shareholders to remain employed by the Company in order to be able to exercise the put options. Compensation expense is being recognized using the straight-line method over the period from the issue date to the exercise date.

As part of the negotiations of contingent consideration the former owners of certain 2001 acquisitions agreed to relinquish their rights to put options on 730,000 common shares at December 31, 2003 and on 1,423,000 common shares at December 31, 2002. Accordingly at December 31, 2003 no put options were outstanding on our common shares.

(4) The condensed consolidated statements of earnings and cash flows for the years ended December 31, 2003, 2002 and 2001 and the condensed consolidated balance sheets as at December 31, 2003 and 2002, under U.S. GAAP are as follows:

	2003			2002			2001
Condensed consolidated statements of earnings:
Revenue	$	286,359		$	219,960		$	156,079
Net earnings before income taxes	$	55,376		$	40,781		$	15,213
Net earnings	$	36,435		$	26,351		$	9,858
Condensed consolidated statements of cash flows:
Cash provided by operating activities	$	53,936		$	19,456		$	6,910
Cash (used in) investing activities	$	(20,146	)	$	(8,970	)	$	(130,687	)
Cash provided by financing activities	$	4,553		$	3,176		$	130,881
Effect of exchange rate changes in cash and cash equivalents	$	3,067		$	—		$	—
Condensed consolidated balance sheets:
Total current assets	$	314,396		$	235,416
Total assets(6)	$	696,440		$	593,337
Total current liabilities	$	233,448		$	200,848
Total liabilities(6)	$	355,276		$	306,268
Mezzanine equity	$	—		$	7,712
Total shareholders’ equity	$	341,164		$	279,357

(5) Under U.S. GAAP, comprehensive income is measured in accordance with SFAS No. 130, Reporting Comprehensive Income. This standard defines comprehensive income as all changes in equity other than those resulting from investments by owners and distributions to owners and includes the change in unrealized gains (losses) on debt and equity securities and foreign currency translation adjustments. Under Canadian GAAP unrealized gains and losses (arising from a temporary decline in value) on equity securities are not recorded and foreign currency translation adjustments are presented as movements in the cumulative translation account. Certain disclosures required by SFAS 115, Accounting for Certain Investments in Debt and Equity Securities,

ANNUAL REPORT December 31, 2003 HUB INTERNATIONAL LIMITED    67 

have not been included as such disclosures related to the Company’s investments in debt and equity securities are immaterial to the overall financial statement presentation.

(6)

Under Canadian GAAP, the Company accounts for the interest rate swap transaction which converted fixed rate interest payments of 5.71% and 6.16% on the Senior Notes of $10 million and $55 million, respectively, using the synthetic instruments method. Under this method, the Company reports in earnings the net interest expense on the swap and associated debt as if it were a single, synthetic, financial instrument. The fair value of the swap, estimated at $2.6 million, is not recognized in the Company’s Canadian GAAP financial statements. Under U.S. GAAP, the Company has designated the swap transaction of a hedge of changes in the fair value of its fixed rate debt caused by changes in interest rates. Under SFAS 133, Accounting for Derivative Instruments and Hedging Activities, the Company records the swap on its U.S. GAAP balance sheet at its fair value. Changes in fair value of the swap are reported in earnings. Changes in the fair value of the debt being hedged which are attributable to changes in interest rates are recognized in earnings by adjustment of the carrying amount of the debt.

Effects of New Accounting Pronouncements

The Company is not aware of any new accounting pronouncements which will impact on its financial reporting.

19. Quarterly Data (unaudited)

	First		Second		Third		Fourth		Full
	quarter		quarter		quarter		quarter		year
Year ended December 31, 2003
Revenue	$	68,877	$	74,155	$	64,671	$	78,656	$	286,359
Net earnings	$	8,904	$	10,109	$	6,820	$	10,676	$	36,509
Net earnings per share — Basic	$	0.30	$	0.34	$	0.23	$	0.36	$	1.22
Net earnings per share — Diluted	$	0.28	$	0.31	$	0.22	$	0.33	$	1.14
Year ended December 31, 2002
Revenue	$	49,484	$	57,296	$	49,552	$	63,628	$	219,960
Net earnings	$	4,939	$	10,712	$	5,422	$	8,328	$	29,401
Net earnings per share — Basic	$	0.25	$	0.53	$	0.21	$	0.31	$	1.27
Net earnings per share — Diluted	$	0.21	$	0.41	$	0.19	$	0.26	$	1.06

20. Subsequent event

In the first quarter of 2004 certain of the Company’s subsidiaries changed their names and as a result, the Company will recognize a non-cash impairment expense of approximately $2.6 million before tax related to trademarks.

  68   HUB INTERNATIONAL LIMITED ANNUAL REPORT December 31, 2003

Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Under SEC rules, we are required to maintain disclosure controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Our chief executive officer and chief financial officer conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-14(c) and 15d-14(c) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act) as of December 31, 2003 (the Evaluation Date). Based on that evaluation, our chief executive officer and chief financial officer concluded that as of the Evaluation Date, our disclosure controls and procedures were effective in timely alerting them to material information relating to us required to be disclosed in our reports filed or submitted under the Exchange Act. In addition, there have been no significant changes (including corrective actions with regard to significant deficiencies or material weaknesses) in the design or operation of our internal control over financial reporting or in other factors that could significantly affect our internal control over financial reporting during the fourth quarter of 2003. Notwithstanding the foregoing, there can be no assurance that our disclosure controls and procedures will detect or uncover all failures within our company to disclose all material information otherwise required to be set forth in our periodic reports.

PART III

Item 10.  Directors and Executive Officers of the Registrant

Information regarding directors, nominees for directors and executive officers is included under the caption entitled “Election of Directors” and “Management” in the 2004 Proxy Statement and is incorporated herein by reference.

Item 11.  Executive Compensation

Information regarding executive compensation of directors and executive officers is included in the 2004 Proxy Statement under the caption entitled “Executive Compensation and Related Information” and is incorporated herein by reference.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

Information regarding beneficial ownership of the common shares by certain beneficial owners and by management is included under the caption entitled “Security Ownership of Management and Certain Beneficial Holders” in the 2004 Proxy Statement and is incorporated herein by reference.

Item 13.  Certain Relationships and Related Transactions

Information regarding certain relationships and related transactions is included under the caption entitled “Certain Relationships and Related Transactions” in the 2004 Proxy Statement and is incorporated herein by reference.

Item 14.  Principal Accountant Fees and Services

Information regarding principal accountant fees and services is included under the caption entitled “Principal Accountant Fees and Services” in the 2004 Proxy Statement and is incorporated herein by reference.

ANNUAL REPORT December 31, 2003 HUB INTERNATIONAL LIMITED    69 

PART IV

Item 15.  Exhibits, Financial Statements Schedules and Reports on Form 8-K

(a)(1) Financial Statements

Reference is made to the information set forth in Part II, Item 8 of this report, which information is incorporated herein by reference.

(a)(2) Exhibits

The exhibits to this report are listed in (c) below. Each exhibit listed therein which constitutes a management contract or compensatory plan or arrangement is identified with the symbol (*).

(b) Reports on Form 8-K

We filed a Current Report on Form 8-K on October 30, 2003 to furnish a press release under Item 9 and Item 12 announcing the Company’s third quarter 2003 financial results.

(c) Exhibits

Exhibit
No.		Description of Exhibit
	2.1	Stock Purchase Agreement by and among Hub U.S. Holdings, Inc. and Fifth Third Financial Corp., dated December 29, 2002 (incorporated by reference to the registrant’s Current Report on Form 8-K filed January 7, 2003)
	3.1†	Articles of Incorporation of the registrant
	3.2†	By-laws of the Registrant
	4.1†	Specimen Certificate representing Common Shares
	10.1†	Agreement and Plan of Merger between HUB International Limited, 416 Acquisition Inc. and Kaye Group Inc. dated January 19, 2001
	10.2†*	Executive Share Purchase Plan
	10.3†*	Employee Share Purchase Plan
	10.4†*	Employment Agreement dated as of March 19, 2002 between HUB International Limited and Martin P. Hughes
	10.5†*	Executive confidentiality, non-solicitation and insider agreement dated as of March 19, 2001 between HUB International Limited and its subsidiaries and Martin P. Hughes
	10.6†*	Employment Agreement dated as of March 19, 2002 between HUB International Limited and Richard A. Gulliver
	10.7†*	Executive confidentiality, non-solicitation and insider agreement dated as of March 19, 2001 between HUB International Limited and its subsidiaries and Richard A. Gulliver
	10.8†*	Employment Agreement dated as of March 19, 2002 between HUB International Limited and Dennis J. Pauls
	10.9†*	Executive confidentiality, non-solicitation and insider agreement dated as of March 19, 2001 between HUB International Limited and its subsidiaries and Dennis J. Pauls
	10.10†*	Employment Agreement dated as of March 19, 2002 between HUB International Limited and W. Kirk James
	10.11†*	Executive confidentiality, non-solicitation and insider agreement dated as of March 19, 2001 between HUB International Limited and its subsidiaries and W. Kirk James
	10.12†*	Employment Agreement dated as of June 28, 2001 among Kaye Group Inc., HUB International Limited and Bruce D. Guthart
	10.13†*	Employment Agreement dated as of January 1, 2002 among Barton Insurance Brokers Ltd., HUB International Limited and R. Craig Barton

  70   HUB INTERNATIONAL LIMITED ANNUAL REPORT December 31, 2003

Exhibit
No.		Description of Exhibit
	10.14*	HUB International Limited Equity Incentive Plan, as amended (incorporated by reference to the registrant’s Definitive Proxy Statement and Management Circular on Schedule 14A as filed with the Commission on March 31, 2003)
	10.15*	Amendment to Amended and Restated Credit Agreement dated as of August 22, 2002 between Hub International Limited and Bank of Montreal (incorporated by reference to the registrant’s Annual Report on Form 10-K, for the period ended December 31, 2002 (the “2002 10-K”)
	10.16†	Debenture dated as of June 28, 2001 between HUB International Limited and Odyssey Reinsurance Corporation
	10.17†	Debenture dated as of June 28, 2001 between HUB International Limited and United States Fire Insurance Company
	10.18†	Contingent Compensation Agreement dated as of May 30, 2002 between Fairfax, Inc. and Program Brokerage Corporation
	10.19†	Underwriting Services Agreement dated as of January 1, 2002 between Old Lyme Insurance Company of Rhode Island, Inc. and Program Brokerage Corporation
	10.20†	Claims Services Agreement dated as of May 30, 2002 between Old Lyme Insurance Company of Rhode Island, Inc. and Claims Administration Corporation
	10.21†	Administrative Services and Cost Allocation Agreement dated as of January 1, 2002 between Old Lyme Insurance Company of Rhode Island, Inc. and Kaye Group Inc.
	10.22*	Employment Agreement dated as of May 15, 1996, between Kaye Group Inc. and Michael Sabanos, as amended (incorporated by reference to the 2002 10-K)
	10.23	Letter Agreement dated July 15, 2003 between Bank of Montreal and HUB International Limited relating to an Interest Rate Swap Transaction on USD $10,000,000 (incorporated by reference to the registrant’s Quarterly Report on 10-Q, for the period ended September 30, 2003 (the “Third Quarter 2003 10-Q”))
	10.24	Letter Agreement dated July 15, 2003 between Bank of Montreal and HUB International Limited relating to an Interest Rate Swap Transaction on USD $55,000,000 (incorporated by reference to the Third Quarter 2003 10-Q)
	10.25	Note Purchase Agreement between Hub International Limited and each of the purchasers regarding the U.S. $10,000,000 5.71% Series A Senior Notes due June 15, 2010 and U.S. $55,000,000 6.16% Series B Senior Notes due June 15, 2013 (excluding any appendixes and exhibits thereto)
	10.26*	Management Bonus Modification Agreement effective as of December 31, 2003 between Hub International Limited, each Operating Subsidiary and each of the Eligible Managers, as applicable (excluding any appendixes and exhibits thereto)
	21.1	List of Registrant’s subsidiaries
	23.1	Consent of PricewaterhouseCoopers LLP
	31.1	Certification of the Chief Executive Officer, Martin P. Hughes, pursuant Rule 13a — 14(a) or 15d — 14(a), as enacted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	31.2	Certification of the Chief Financial Officer, Dennis J. Pauls, pursuant Rule 13a — 14(a) or 15d — 14(a), as enacted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	32.1	Certification of the Chief Executive Officer, Martin P. Hughes, pursuant to 18 U.S.C. Section 1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	32.2	Certification of the Chief Financial Officer, Dennis J. Pauls, pursuant to 18 U.S.C. Section 1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

†	Incorporated herein by reference to the registrant’s Registration Statement on Form S-1 (No. 333-84734), as filed with the Securities and Exchange Commission (the “Commission”) on March 22, 2002.
*	Management contract or compensatory plan or arrangement.

ANNUAL REPORT December 31, 2003 HUB INTERNATIONAL LIMITED    71 

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 15, 2004.

Hub International Limited

Martin P. Hughes

Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on March 15, 2004.

SIGNATURE	TITLE
/s/ MARTIN P. HUGHES Martin P. Hughes	Chairman of the Board and Chief Executive Officer (Principal Executive Officer)
/s/ DENNIS J. PAULS Dennis J. Pauls	Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)
/s/ RICHARD A. GULLIVER Richard A. Gulliver	President, Director
/s/ R. CRAIG BARTON R. Craig Barton	President, Canadian Operations, Director
/s/ BRUCE GUTHART Bruce Guthart	Chief Operating Officer and President, U.S. Operations, Director
/s/ JEAN MARTIN Jean Martin	Director, Vice President
/s/ ANTHONY GRIFFITHS Anthony Griffiths	Director
/s/ BRADLEY MARTIN Bradley Martin	Director
/s/ PAUL MURRAY Paul Murray	Director
/s/ FRANK WILKINSON Frank Wilkinson	Director

  72   HUB INTERNATIONAL LIMITED ANNUAL REPORT December 31, 2003

EXHIBIT INDEX

Exhibit
No.		Description of Exhibit
	2.1	Stock Purchase Agreement by and among Hub U.S. Holdings, Inc. and Fifth Third Financial Corp., dated December 29, 2002 (incorporated by reference to the registrant’s Current Report on Form 8-K filed January 7, 2003)
	3.1†	Articles of Incorporation of the registrant
	3.2†	By-laws of the Registrant
	4.1†	Specimen Certificate representing Common Shares
	10.1†	Agreement and Plan of Merger between HUB International Limited, 416 Acquisition Inc. and Kaye Group Inc. dated January 19, 2001
	10.2†*	Executive Share Purchase Plan
	10.3†*	Employee Share Purchase Plan
	10.4†*	Employment Agreement dated as of March 19, 2002 between HUB International Limited and Martin P. Hughes
	10.5†*	Executive confidentiality, non-solicitation and insider agreement dated as of March 19, 2001 between HUB International Limited and its subsidiaries and Martin P. Hughes
	10.6†*	Employment Agreement dated as of March 19, 2002 between HUB International Limited and Richard A. Gulliver
	10.7†*	Executive confidentiality, non-solicitation and insider agreement dated as of March 19, 2001 between HUB International Limited and its subsidiaries and Richard A. Gulliver
	10.8†*	Employment Agreement dated as of March 19, 2002 between HUB International Limited and Dennis J. Pauls
	10.9†*	Executive confidentiality, non-solicitation and insider agreement dated as of March 19, 2001 between HUB International Limited and its subsidiaries and Dennis J. Pauls
	10.10†*	Employment Agreement dated as of March 19, 2002 between HUB International Limited and W. Kirk James
	10.11†*	Executive confidentiality, non-solicitation and insider agreement dated as of March 19, 2001 between HUB International Limited and its subsidiaries and W. Kirk James
	10.12†*	Employment Agreement dated as of June 28, 2001 among Kaye Group Inc., HUB International Limited and Bruce D. Guthart
	10.13†*	Employment Agreement dated as of January 1, 2002 among Barton Insurance Brokers Ltd., HUB International Limited and R. Craig Barton
	10.14*	HUB International Limited Equity Incentive Plan, as amended (incorporated by reference to the registrant’s Definitive Proxy Statement and Management Circular on Schedule 14A as filed with the Commission on March 31, 2003)
	10.15*	Amendment to Amended and Restated Credit Agreement dated as of August 22, 2002 between Hub International Limited and Bank of Montreal (incorporated by reference to the registrant’s Annual Report on Form 10-K, for the period ended December 31, 2002 (the “2002 10-K”)
	10.16†	Debenture dated as of June 28, 2001 between HUB International Limited and Odyssey Reinsurance Corporation
	10.17†	Debenture dated as of June 28, 2001 between HUB International Limited and United States Fire Insurance Company
	10.18†	Contingent Compensation Agreement dated as of May 30, 2002 between Fairfax, Inc. and Program Brokerage Corporation
	10.19†	Underwriting Services Agreement dated as of January 1, 2002 between Old Lyme Insurance Company of Rhode Island, Inc. and Program Brokerage Corporation

ANNUAL REPORT December 31, 2003 HUB INTERNATIONAL LIMITED    73 

Exhibit
No.		Description of Exhibit
	10.20†	Claims Services Agreement dated as of May 30, 2002 between Old Lyme Insurance Company of Rhode Island, Inc. and Claims Administration Corporation
	10.21†	Administrative Services and Cost Allocation Agreement dated as of January 1, 2002 between Old Lyme Insurance Company of Rhode Island, Inc. and Kaye Group Inc.
	10.22*	Employment Agreement dated as of May 15, 1996, between Kaye Group Inc. and Michael Sabanos, as amended (incorporated by reference to the 2002 10-K)
	10.23	Letter Agreement dated July 15, 2003 between Bank of Montreal and HUB International Limited relating to an Interest Rate Swap Transaction on USD $10,000,000 (incorporated by reference to the registrant’s Quarterly Report on 10-Q, for the period ended September 30, 2003 (the “Third Quarter 2003 10-Q”))
	10.24	Letter Agreement dated July 15, 2003 between Bank of Montreal and HUB International Limited relating to an Interest Rate Swap Transaction on USD $55,000,000 (incorporated by reference to the Third Quarter 2003 10-Q)
	10.25	Note Purchase Agreement between Hub International Limited and each of the purchasers regarding the U.S. $10,000,000 5.71% Series A Senior Notes due June 15, 2010 and U.S. $55,000,000 6.16% Series B Senior Notes due June 15, 2013 (excluding any appendixes and exhibits thereto)
	10.26*	Management Bonus Modification Agreement effective as of December 31, 2003 between Hub International Limited, each Operating Subsidiary and each of the Eligible Managers, as applicable (excluding any appendixes and exhibits thereto)
	21.1	List of Registrant’s subsidiaries
	23.1	Consent of PricewaterhouseCoopers LLP
	31.1	Certification of the Chief Executive Officer, Martin P. Hughes, pursuant Rule 13a — 14(a) or 15d — 14(a), as enacted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	31.2	Certification of the Chief Financial Officer, Dennis J. Pauls, pursuant Rule 13a — 14(a) or 15d — 14(a), as enacted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	32.1	Certification of the Chief Executive Officer, Martin P. Hughes, pursuant to 18 U.S.C. Section 1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	32.2	Certification of the Chief Financial Officer, Dennis J. Pauls, pursuant to 18 U.S.C. Section 1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

†  Incorporated herein by reference to the registrant’s Registration Statement on Form S-1 (No. 333-84734), as filed with the Securities and Exchange Commission (the “Commission”) on March 22, 2002.

*  Management contract or compensatory plan or arrangement.

  74   HUB INTERNATIONAL LIMITED ANNUAL REPORT December 31, 2003