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FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF

For Quarter Ended: March 31, 2003

Commission file number: 1-31310

HUB INTERNATIONAL LIMITED

(Exact name of registrant as specified in its Charter)

(877) 402-6601

Registrant’s telephone number, including area code

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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ          No o

Indicate by check mark whether the registrant is an accelerated filer as defined in Rule 12b-2 of the Exchange Act.

Yes o          No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

HUB INTERNATIONAL LIMITED

INDEX

PART I. FINANCIAL INFORMATION

Hub International Limited

As of March 31, 2003 and December 31, 2002

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

Hub International Limited

For the three months ended March 31, 2003 and 2002

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

Hub International Limited

For the three months ended March 31, 2003 and 2002

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

Hub International Limited

For the three months ended March 31, 2003 and 2002

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

Hub International Limited

For the three months ended March 31, 2003 and 2002 (unaudited)

2.  Summary of significant accounting policies

3.  Earnings per share

4. Commitments and contingencies

(a)	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 $5,417 and $5,077 as of March 31, 2003 and December 31, 2002, respectively, to assist in purchasing common shares of the Company. As collateral, the employees have pledged 598 and 602 common shares as of March 31, 2003 and December 31, 2002, respectively, which have a market value of $8,060 and $7,677 as of March 31, 2003 and December 31, 2002, respectively. Interest on the loans in the amount of $68 and $61 for the three months ended March 31, 2003 and 2002, respectively, was paid by the Company and is included in compensation expense.
(b)	The Company has committed to award, under the Company’s equity incentive plan, an aggregate of 266 restricted shares that will be paid for by the participants (none of whom are members of senior management or directors of the Company) with loans either from the Company or from a bank (guaranteed by the Company). In addition, the Company has committed to award an aggregate of 471 restricted share units that are exercisable for common shares, without payment of cash consideration. As of March 31, 2003, no restricted shares or restricted share units had been awarded or issued.
(c)	The Company anticipates that stock options will be granted in February 2004 in partial consideration of executive management profitability bonuses for 2003. Management has estimated the amount of these bonuses for 2003, and the fair value of stock options likely to be granted. In accordance with the Canadian Institute of Chartered Accountants (CICA) Accounting Standards Board Handbook Section 3870, “Stock-Based Compensation and Other Stock-Based Payments”, the fair value of these options is being recognized as an expense evenly over the period they are earned. The expense for these options for the three months ended March 31, 2003 was $349 and is included in non-cash stock option compensation with an offsetting credit to contributed surplus.
(d)	Contingent consideration may be issued in connection with the 2001 acquisition of J.P. Flanagan Corporation (Flanagan) as follows:

	The 2003 shares include 38 shares in each category that have been carried over from 2002. The former owners of Flanagan will be entitled to receive the 2002 shares if the 2003 contingent consideration targets are met or exceeded.
	In connection with the 2002 acquisition of C.S. Nenner Insurance Agency, Inc. (Nenner) the former owners of Nenner are entitled to contingent consideration based upon the acquired operations achieving profitability targets over a period of three years from the date of acquisition. As of March 31, 2003, we estimate the total contingent payment for Nenner to be approximately $4,500 of which 90% is payable in cash and 10% is payable in common shares. As of March 31, 2003, the Company has recorded liabilities and the related adjustment to goodwill as it related to this contingent consideration in the amount of $486 based upon amounts earned to-date by the former owners of Nenner. In addition, diluted shares outstanding has been increased for the common shares that will be issued.

(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.

5.  Intangible assets

Additions for the three months ended 2003 were as follows:

The Company is unable to estimate the useful life of non-competition covenants and trademarks. These indefinite life intangible assets will be reviewed at least 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.

The changes in the carrying amount of goodwill for the three months ended March 31, 2003 are as follows:

For the three months ended March 31, 2003 and 2002, amortization was comprised of the following:

We estimate that our amortization charges for 2003 through 2007 for all acquisitions consummated to date will be:

6.  Recent Acquisitions

The Burnham contingent consideration recorded at December 31, 2002 was paid and or issued in the first quarter of 2003. The payment consisted of cash of $8.4 million and $13.7 million in shares.

7.  Debt

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

(1)	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) and reduce 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 2002 which reduced interest payments to zero from $229. It was not yet determinable if a credit had been earned for 2003.
*	Certain property and equipment have been pledged as collateral in amounts not less than the outstanding balance of the loan at March 31, 2003 and December 31, 2002, respectively.

Revolving U.S. dollar LIBOR loan

Borrowings under this $50 million facility totaled $50.0 million at March 31, 2003 and December 31, 2002, and are accessed at a floating rate of 112.5 basis points above LIBOR, which was 1.31% and 1.42% at March 31, 2003 and December 31, 2002, respectively. This facility expires on June 20, 2003 and requires the Company to maintain certain financial ratios. The Company intends to extend the facility for a further period of one year; however, if the revolving period is not extended, any amounts outstanding will automatically convert into a three-year term loan at a fixed interest rate equal to the Canadian dollar interest swap rate quoted by the lender plus 1.375%. At March 31, 2003, no amounts under this facility remained available to be drawn by the Company. The Company was in compliance with all financial covenants governing this facility as of March 31, 2003 and December 31, 2002.

Demand U.S. dollar base rate loan

Borrowings under this $8.2 million facility totaled $NIL at March 31, 2003 and December 31, 2002 and are accessed at the bank’s U.S. base rate plus 50 basis points which was 5.25% at March 31, 2003 and December 31, 2002. Payment is due on demand.

Put Options

Long-term debt at March 31, 2003 and December 31, 2002, includes the estimated value of the financial liability of $6,405 and $5,940, respectively, relating to put options on 730 common shares, exercisable at a price of C$17.00 per share, issued to former owners of Flanagan who are officers and employees of the Company. The put options are exercisable as follows:

The Company will not be required to settle the liabilities in cash if the common share price exceeds C$17.00 on each of the above mentioned exercise dates. Any put options not exercised on the exercise date immediately expire.

Subordinated convertible debentures

In connection with the acquisition of Kaye Group Inc. (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 33% of the Company’s outstanding common shares as of March 31, 2003.

8.  Shareholders’ equity

At March 31, 2003 and December 31, 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 March 31, 2003 and December 31, 2002, there were an unlimited number of common shares authorized, of which 30,250 and 29,025 were issued and outstanding as at March 31, 2003 and December 31, 2002, respectively.

Cumulative translation account

Contributed surplus

Contributed surplus at March 31, 2003 and December 31, 2002 of $2,229 and $1,234, respectively, is primarily related to non-cash stock option compensation.

9.  Equity Incentive Plan

A summary of the stock option activity and related information for the three months ended March 31, 2003 consists of the following:

The following table summarizes information about the stock options outstanding at March 31, 2003:

*	Certain options vested and became exercisable during the first quarter of 2003 due to employee terminations.

The aggregate fair value of options granted on February 28, 2003 of $1,230 was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: (i) dividend yield of 2.0%, (ii) expected volatility range of 40.1%, (iii) risk-free interest rate of 2.9% and (iv) expected life of five years. The fair value of the options granted is being recognized as an expense over the vesting period. For the three months ended March 31, 2003, non-cash stock option compensation of $962 was expensed with an offsetting credit 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.

10. Income taxes

Income taxes in the first quarter of 2003 and 2002 amounted to $5.4 million and $2.1 million, respectively, resulting in an effective tax rate of 38% and 29% in 2003 and 2002, respectively. The increase in our effective tax rate was primarily the result of a higher percentage of income taxed in the U.S. where tax rates are significantly higher than in other jurisdictions.

11. Interest and income taxes paid

Interest and income taxes paid for the three months ending March 31, 2003 and 2002 were:

12. 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.

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