SecProbe.io

CORRESP
1
filename1.htm

Hub International

Table of Contents

[HUB INTERNATIONAL LIMITED LETTERHEAD]

November 11, 2005

BY EDGAR

Securities and Exchange Commission

Division of Corporation Finance

100 F Street, N.E.

Washington, D.C. 20549

    Attention:

    Jim B. Rosenberg

Senior Assistant Chief Accountant

    Re:

    Hub International Limited (the “Company”)

Form 10-K for Fiscal Year Ended December 31, 2004

File No. 1-31310

Dear Mr. Rosenberg:

     We hereby acknowledge receipt of the comment letter dated October 21, 2005 (the “Comment
Letter”) from the staff (the “Staff”) of the Securities and Exchange Commission (the “Commission”)
concerning the above captioned Annual Report on Form 10-K for the fiscal year ended December 31,
2004 (the “10-K”).

     We submit this letter in response to the Comment Letter. For ease of reference, we have
reproduced the text of the comments in bold-face type below, followed by our responses. Terms used
but not defined herein have the meanings set forth in the 10-K.

TABLE OF CONTENTS

RESPONSES TO STAFF COMMENTS

Table of Contents

Page 2

RESPONSES TO STAFF COMMENTS

Consolidated Financial Statements

Note 2. Summary of Significant Accounting Policies

Revenue Recognition, page 51

    1.

    Please refer to prior comment two. Please tell us your costs associated with billing and
collection services performed subsequent to the policy effective date. If these services are
not inconsequential and perfunctory, explain your basis for recognizing all revenue associated
with these services at the policy effective date. Include applicable references to the
technical guidance.

    Response: We generally recognize commission income on the policy effective date. The term
effective date means the date from which protection is afforded under an insurance policy.
At the effective date, we become entitled to the commission because the insurance coverage
has been placed with the underwriter and the premium is owed by the client. On the
effective date our work has been substantially completed and the related costs to produce,
market and place the coverage have been incurred. We generally bill in the month of the
effective date. As such, the amount of the commission related to the services provided has
been determined and the premium is receivable as of that date. Accordingly, for any given
policy, commission income is recognized on the revenue recognition date (the policy
effective date), at which time the earnings process is complete and the services for which
we have been contracted to perform have been provided. This is in accordance with the
criteria set forth in SAB 101 and SAB 104. Any billing and collection activity occurring
after the policy effective date is inconsequential and perfunctory

    As an insurance brokerage we generally have two types of commission income: direct billed
commissions and agency billed commissions. With direct bill, the insured is billed by the
underwriter directly. The underwriter collects directly from the insured. We are then paid
for our brokerage services (generally commission income) directly from the underwriter.
Accordingly, we do not bill or collect fees directly from the insured. Commission income
for direct billed commissions is recognized on the effective policy date.

    The other type of commission income is agency billed commission. In these arrangements we
bill the insured directly, normally on or before the effective date of the policy. Invoices
are computer generated along with the insurance policy from our broker management systems
and mailed directly to the insured.

    For both types of billing, direct bill and agency bill, the costs of billing and collection
are de minimis and are not tracked by us. For direct bill — we do not bill and for agency
bill — the process is automated as a part of the sale. The collection process is generally
passive and is clerical in nature, performed by accounting clerks that have other
responsibilities. Accounts that are over 120 days old generally are referred to collection

Table of Contents

Page 3

    agencies. In addition, while commission rates are individually negotiated and therefore
vary for different contracts, whether an arrangement is direct bill or agency bill has no
impact on the commission the Company earns.

    In concluding that billing and collection activities occurring subsequent to the policy
effective date are inconsequential and perfunctory we evaluated the guidance in SAB 104,
specifically Topic 13A — 3c, questions 1 and 2. These activities are not “essential to the
functionality of the delivered product or service.” The client has insurance coverage on
the policy effective date regardless of any subsequent billing and collections. “Failure to
complete the activities would not result in the customer... rejecting the products or
services performed to date”. In addition, we reviewed the additional factors in question 2
which support our conclusion that billing and collection are not substantive but
inconsequential and perfunctory as follows: (1) we have a history of billing and collection
in a timely manner, (2) the time to perform these activities has not varied from one
instance to another, (3) the skills required to complete these
activities are not specialized
and are readily available in the market place, (4) the cost of completing the activities is
less than insignificant (in fact, the cost is de minimis) in relation to the commission
income, (5) the period before the remaining activities to be provided is not lengthy, and
(6) the timing of payment is not coincident with the completion of the sale of insurance.
The policy effective date is the time at which the earnings process is complete and
therefore is the appropriate time for the Company to recognize commission income.

    2.

    Please refer to prior comment four. Your response did not appear to include an explanation
of the financial impact of billing and collection services on your operations and cash flows,
including related service fee income, interest income on funds held, and costs associated with
uncollectible amounts. Also, we were unable to locate your explanation of “other deductions”
and restrictions relating to trust cash. Please provide this information in disclosure type
format.

    Response: Billing and collection activities impact our cash flow from operations, but do
not impact the timing of commission income recognition. The Company looks to the policy
effective date as the date on which the earnings process is complete and revenue should be
recognized. Billing and collection activities, particularly for renewals of policies,
typically occur in the month prior to the expiration of the insured’s policy. For new
policies, the billing process commences once the arrangement between the broker and the
insured is agreed to, typically before the effective date of the policy. Our invoicing
system triggers the credit to our revenue accounts, which is then subsequently reconciled to
defer income until the effective date of the policy. In cases where we are billing in
periods subsequent to the effective date of the policy, commission income is accrued and
recognized in that period.

    In certain circumstances we charge policy service fees in lieu of commissions. We record
policy service fees on the policy effective date. Costs associated with uncollectible
accounts are recorded in selling, occupancy and administrative expense (bad debts) and the
allowance for doubtful accounts is netted against “accounts and other receivables” on our
balance sheet and detailed in our financial statement notes. However,

Table of Contents

Page 4

    given that we incur only de minimis cost in connection with billing and collection
activities, these activities do not impact our income statement or other results of
operations.

    For agency bill commission, we bill our clients for the gross premium, retain our commission
income, and remit the net premium (gross premium less our commission) to the underwriter.
Premiums collected (less commissions and other deductions), but not yet remitted to the
underwriter, 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 we operate. Certain states
and provinces have varying restrictions on the investment of trust cash, which may include
limiting the nature of acceptable investments. As a result of these restrictions we
generally invest such funds in short-term cash equivalents and retain the resulting
investment income, which is recorded when earned. We sometimes may advance premiums to
underwriters on behalf of our clients or may advance claim payments or return premiums to
our clients on behalf of underwriters. The advances may be made because of the payment
terms to the underwriter or because we wish to avoid cancellation of our clients’ coverages.
“Other deductions” from premiums collected include these advance payments to underwriters
as well as advance claim payments and return premiums to our clients. Other deductions do
not have an impact on our consolidated statement of earnings.

Note 13. Earnings per Share, page 67

    3.

    Please refer to prior comment five. Please address the following in disclosure type format:

    •

    Your calculation of diluted earnings per share includes 303,000 shares related to
the Talbot earn out, but we were unable to understand the explanation of the
calculation provided in your response. Describe the terms of the Talbot earn out in
greater detail and provide a calculation supporting the 303,000 shares that is
integrated with your $35 million estimate for the remaining earn out.

    •

    You state in Note 4 that the Talbot earn-out is to be paid in stock while your
response indicates that this payment can be made either in cash or stock and that the
initial payment was made in cash. Please clarify this apparent inconsistency.

    •

    We understand that Satellite is now a wholly owned subsidiary with outstanding
“special shares” issued to former management prior to the Talbot acquisition. Please
explain the nature of these special shares, their balance sheet classification and your
accounting for their disposition under these earn out arrangements.

    Response: The Company advises Staff, by way of background information, that on July 1,
2004, we purchased all of the common shares of Satellite Acquisition Corporation
(“Satellite”), a corporation formed by senior management at Talbot Financial Corporation
(“Talbot”). In turn, Satellite purchased 100% of the common shares of Talbot from

Table of Contents

Page 5

    Safeco Corporation. In connection with the acquisition, the Company agreed to acquire
special shares of Satellite, which are owned by the management of Talbot, to be settled with
a combination of the Company’s restricted and unrestricted common shares, or cash. The
first payment of $16.4 million for one-third of the special shares was earned by Talbot’s
management based upon Talbot’s earnings for the 12 months ending December 31, 2004. The
earn-out payment was settled in cash on September 1, 2005. Remaining contingent payments
with respect to one-third of the originally issued number of special shares will be made on
each of March 31, 2006 and March 31, 2007, and will be based upon Talbot’s earnings for the
12 month periods ending December 31, 2005 and 2006, respectively. The contingent payment to
Talbot management is recorded by the Company as compensation expense over the period in
which the contingent earn-out payments are earned by Talbot management. At December 31,
2004, we estimated that the aggregate value of compensation to be recognized under this
arrangement to be between $45-$50 million.

    In response to your specific comments:

    •

    We follow the principles of the treasury stock method in applying FAS 128,
Earnings per Share, including the guidance on contingent shares (or
contingently adjustable shares) in paragraphs 23 and 32-33. Additional shares included
in the denominator of the diluted EPS calculation represent the difference between the
total number of shares expected to be issued (i.e., the total estimated value of the
contingent payment of $49.755 million divided by the Company’s share price of $17.80,
totaling 2,795,000 shares), and the estimated number of shares deemed to have been
repurchased on the assumption that the estimated unamortized compensation expense is to
repurchase shares at their average price for the period ($49.755 million, less $14.388
million already expensed, totals $35.367 million (the future value of compensation),
which divided by $17.80 equals 1,987,000 shares). 2,795,000 shares expected to be
issued less 1,987,000 shares to be repurchased equals 808,000 shares outstanding for
the fourth quarter of 2004. This same calculation at September 30, 2004 reflects
404,000 shares outstanding for the third quarter of 2004.

    Accordingly, the 404,000 shares outstanding for the third quarter of 2004 are assumed
to be outstanding for two of four quarters (the third and fourth quarters of 2004)
totaling a weighted average 202,000 shares outstanding. The incremental 404,000 shares
to bring the total to 808,000 shares outstanding for the fourth quarter of 2004 are
assumed to be outstanding for one of four quarters (the fourth quarter of 2004 only)
totaling a weighted average 101,000 shares outstanding; thus resulting in a total of a
weighted average 303,000 shares outstanding for the 2004 year as reflected in our 2004
Form 10-K.

    Please refer to the following schedule which provides a tabular summary of these
calculations:

Talbot
Earn-out Shares

    Total estimated value of Talbot earnout at 12/31/04

    [1]

    $
    49.755M

    Average share price of Hub common shares

    [2]

    $
    17.80

    Total number of earnout shares expected to be
issued at 12/31/04

    [3] = [1]/[2]

    2,795,000

    Total earnout compensation expensed from 7/1/04 —
12/31/04

    [4]

    $
    14.388M

    Total future value of Talbot compensation at
12/31/04

    [5]=[1]-[4]

    $
    35.367M

    Shares deemed to have been repurchased at 12/31/04

    [6]=[5]/[2]

    1,987,000

    Shares outstanding for Q4 2004

    [7]=[3]-[6]

    808,000

    Shares outstanding for Q3 2004 (Q3 shares)

    [8]

    404,000

    Q4 shares

    [9]=[7]-[8]

    404,000

    Weighted average Q3 shares for 1/1/04 — 12/31/04

    [10]=[8]x2 qtrs/4 qtrs

    202,000

    Weighted average Q4 shares for 1/1/04 — 12/31/04

    [11]=[9]x1 qtr /4 qtrs

    101,000

    Talbot
Earn-out Shares considered dilutive for the
year ended 12/31/04

    [10]+[11]

    303,000

Table of Contents

Page 6

    •

    The agreement regarding the earn-out permits the Company to settle any contingent
earn-out payments in stock or cash. At the time the Company’s consolidated financial
statements for the year ended December 31, 2004 were prepared, management intended to
settle all contingent earn-out payments in stock, as indicated in note 3(b) to those
statements. Prior to making the first payment on September 1, 2005, management decided
to make such payment in cash. Note 3(a) to the Company’s interim consolidated
financial statements for the three and nine months ended September 30, 2005 states that
the first earn-out payment was made in cash.

    •

    The special Satellite shares were issued to former Talbot management, in connection
with the Talbot acquisition and in recognition of their role in identifying,
structuring and facilitating the Talbot acquisition. They serve as a basis for the
calculation of the earn-out payment. These special Satellite shares do not represent a
residual equity interest in Talbot (which is 100% owned by the Company). At the end of
the earnout period, the Company will own all of the special Satellite shares, but this
will not change its ownership interest i