2007 Outlook. We expect to continue to focus on our growth initiatives in 2007, including both organic growth and growth through strategic acquisitions of hub and fold-in brokerages. Going into 2007 our acquisition pipeline is full. In addition, we will continue to focus on our sales initiatives during 2007 to drive increases in organic growth through attracting new clients and improving retention of existing clients. We believe that the most significant challenge to our 2007 organic growth initiatives is the expectation of continued “softness” in most of the insurance rate premium markets where our hub brokerages are concentrated. Our 2007 acquisition plan includes the expansion of our geographic footprint in the U.S., specifically into the southeastern, southwestern, and gulf coast regions. On February 14, 2007, we announced that we have agreed to acquire Hibernia Insurance Agency, L.L.C. (“Hibernia”) from Capital One Financial Corp. Hibernia is based in Louisiana and serves clients throughout the southeastern U.S. Hibernia will become our new hub brokerage, Hub Gulf South.
Employee cash compensation expense, excluding severance costs, increased $49.0 million, or 25%, to $244.7 million during the year ended December 31, 2005. Our compensation ratio during 2005 remained relatively consistent with 2004 levels.
Other non-cash share-based compensation increased $0.7 million, or 10%, to $7.2 million during the year ended December 31, 2005. Total other non-cash share-based compensation for the years ended December 31, 2005 and 2004, was comprised of the following (in thousands):
Selling, occupancy, and administration expense increased $10.9 million, or 15%, to $82.8 million during the year ended December 31, 2005. Selling, occupancy, and administration expense as a percentage of revenue decreased to 19% during 2005. The decrease in selling, occupancy, and administration expense as a percentage of revenue was primarily attributable to an increase in revenue and a decrease in external audit fees during 2005.
Other Debt. As of December 31, 2006, we had outstanding $7.1 million of other notes payable and long-term debt primarily incurred by acquired insurance brokerages prior to our acquisition. We intend to repay these obligations as they become due using cash generated from operating activities, existing cash balances, or borrowings from our credit facilities.
As of December 31, 2006, we are not a party to any other significant off-balance sheet financing or contingent payment arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources. As of December 31, 2006, we have no unconsolidated subsidiaries.
The increase in non-competition covenants is attributable to $4.3 million of non-competition covenant intangible assets recorded in connection with 2006 business acquisitions.
The schedule above of estimated future amortization expense does not include any estimates for other intangible assets that may be recorded as part of future acquisitions.
Contingent Commissions and Volume Overrides. Based on arrangements that we have with certain insurance carriers, we may be entitled to contingent commissions and volume overrides. We generally earn contingent commissions and volume overrides based either upon the amount of business we place with an insurance carrier during a specific timeframe or upon the profits earned by an insurance carrier on the business we place with the carrier during a specific timeframe. We recognize contingent commissions and volume overrides during the period that the amounts are reasonably estimable, which generally occurs upon receipt of payment.
On an ongoing basis, we review property and equipment, definite-lived intangible assets, and other long-lived assets for impairment whenever events or circumstances indicate that carrying amounts may not be recoverable. To date, no such events or changes in circumstances have occurred. If such events or changes in circumstances occur, we will recognize an impairment loss if the undiscounted future cash flows expected to be generated by the asset are less than the carrying value of the related asset. The impairment loss would adjust the asset to its fair value.
Conversion of Subordinated Convertible Debentures. During June 2001, we issued to certain subsidiaries of Fairfax Financial Holdings Limited (“Fairfax”) 8.5% convertible subordinated debentures in the amount of $35.0 million, which were due June 28, 2007 (the “Fairfax notes”). The Fairfax notes were convertible by the holders at any time into our common shares at a price of C$17.00 per share. Beginning on June 28, 2006, we could require conversion of the Fairfax notes if, at any time, the weighted average closing price per share of our common shares on the TSX equaled or exceed C$19.00 per share for twenty consecutive trading days. On June 29, 2006, we exercised our conversion option and on that date the Fairfax notes were converted into approximately 2.3 million of our common shares.
We account for business acquisitions using the purchase method, whereby the results of acquired businesses are included in our consolidated financial results from the date of acquisition going forward. In connection with a business acquisition, we may enter into an agreement with the management or shareholders of the acquired business to pay consideration that is contingent on maintaining or achieving specified revenue, earnings, or other financial performance measures in future periods. We record such contingent consideration as goodwill on our consolidated balance sheets when the contingency is resolved and the consideration is issued or becomes issuable. In certain circumstances, we may make payments to non-shareholders as consideration for the acquired business with the characteristics of compensation. We account for such payments as compensation expense in our consolidated statements of earnings. When such compensation payments are made by issuing our common shares, we apply the policies discussed herein under the caption “Share-based Compensation.”
fair value of acquired tangible and intangible assets and assumed liabilities using various valuation methods, including, but not limited to, net realizable values, quoted market prices, and discounted cash flows. For significant business acquisitions, we engage qualified third party valuators to assist us in conducting such fair value valuations.
Our financial instruments primarily consist of cash and cash equivalents, accounts receivable and payable, and long-term debt. The carrying value of current assets and liabilities reasonably approximate their fair values due to the short maturity periods. The carrying values of our debt obligations reasonably approximate their fair values as the stated interest rates approximate current market interest rates of debt with similar terms.
shareholders’ equity under the caption Comprehensive Income. CICA 1530 is meant to remove certain inconsistencies between Canadian and U.S. GAAP and is effective for year ends beginning on or after January 1, 2007. We currently report comprehensive income in accordance with U.S. GAAP as presented in Note 19 “Reconciliation to U.S. GAAP and Effect of New U.S. GAAP Accounting Pronouncements” of these notes to our consolidated financial statements.
We amortize non-competition covenant assets on a straight-line basis over the estimated useful life. The estimated useful life generally includes, for each applicable employee who is subject to a non-competition covenant, (1) his or her effective term of employment plus (2) a contractually determined period, which typically ranges from two years to four years, after his or her employment is terminated. Upon the employee’s termination, we amortize the net book value of the related non-competition covenant on a straight-line basis over the applicable contractual period. Based on our historical experience, we estimate that the average useful life of our non-competition covenant assets is generally 16 years.
In addition, we are charged a commitment fee of 0.20% per annum on undrawn balances under our U.S. Credit Facility.
We lease substantially all of our facilities and certain equipment under non-cancelable operating leases expiring at various dates through 2018. Lease terms are generally five years with one to two renewal options for extended terms. We are required to make additional payments under facility operating leases for taxes, insurance, and other operating expenses incurred during the lease period.
Stock option activity during the years ended December 31, 2006, 2005 and 2004, under the equity incentive plan is as follows (stock options in thousands):
Geographical revenue is determined based on the functional currency of each of our subsidiaries.
Each Company Option that has not been exercised prior to the Effective Time, other than Company Options exchanged by Rollover Shareholders, will be cancelled by Hub in consideration for the right to receive a cash payment from Hub in an amount equal to the difference between $40.00 and the exercise price of such Company Option, less any amounts we are required to withhold for taxes.