Hilltop Holdings Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. The unaudited results primarily reflect Hilltop’s property and casualty insurance operations and investment income. Hilltop was also pursuing opportunistic acquisitions.
Financial results and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenue | $41.3 million | $36.5 million | $81.4 million | $71.2 million |
| Net loss attributable to common stockholders | $10.7 million | $13.2 million | $10.4 million | $11.8 million |
| Loss per share, basic and diluted | $(0.19) | $(0.23) | $(0.18) | $(0.21) |
| Net premiums earned | $36.2 million | $32.6 million | $71.4 million | $63.5 million |
| Net investment income | $3.2 million | $2.2 million | $6.5 million | $4.3 million |
| Combined insurance ratio | 141.8% | 160.4% | 121.1% | 125.6% |
At June 30, total assets were $922.1 million, including $576.4 million in cash and cash equivalents and $215.9 million in investments. Total liabilities were $283.4 million, including $131.5 million of notes payable; stockholders’ equity was $638.7 million. Cash at period-end was down $2.1 million from December 31, 2011. Cash included approximately $529 million at the parent and $48 million at NLASCO and its subsidiaries.
For the first six months, operating cash flow was negative $1.6 million, compared with positive $0.1 million in 2011. Investing activities provided $0.6 million; financing activities used $1.2 million, entirely for share repurchases. Management said available cash, investments, operating cash flows and permitted insurance-subsidiary dividends should meet foreseeable liquidity needs, including after the proposed merger.
Debt was approximately $131.5 million: $84.0 million fixed-rate and $47.5 million variable-rate. The filing estimates a 0.125 percentage-point increase in LIBOR and prime would raise annual interest expense by about $59,000. Insurance subsidiaries had statutory surplus above minimum requirements and risk-based capital ratios above regulatory-action levels. Dividends available without regulatory approval in 2012 were approximately $11.9 million.
Material changes and management commentary
- Revenue rose 13.0% in Q2 and 14.4% for the first six months, driven mainly by higher earned premiums and investment income. Net losses narrowed by $2.5 million in Q2 and $1.5 million year to date.
- Q2 underwriting loss improved to $15.7 million from $20.1 million; the six-month underwriting loss improved to $16.0 million from $17.2 million. Combined ratios remained above 100%, indicating underwriting losses before other income and investment results.
- Q2 loss and loss adjustment expenses declined to $39.1 million from $41.1 million, while six-month losses increased to $61.6 million from $57.1 million. Management cited storm-related losses and higher non-catastrophic claims. Q2 Texas and Southwest tornado, wind and hail losses were $12.5 million; widely dispersed exceptional-weather losses were $2.6 million.
- General and administrative expense increased to $2.9 million in Q2, including $1.1 million in PlainsCapital transaction fees. Six-month G&A rose to $4.6 million, partly due to acquisition-related fees and higher salaries and benefits.
- Unfavorable prior-year reserve development added $2.3 million to six-month incurred losses, primarily from late-reported 2011 homeowners and fire claims.
Outlook, transaction, and risks
- On May 8, 2012, Hilltop agreed to acquire PlainsCapital Corporation for approximately 27.5 million Hilltop shares and $318 million cash. Closing requires shareholder and regulatory approvals and other conditions; Hilltop gave no assurance about timing or completion. Management estimated approximately $200 million of parent cash would remain after closing and related transaction expenses.
- Under specified termination circumstances, including failure to obtain Hilltop shareholder approval, Hilltop could owe PlainsCapital a $17.5 million termination fee.
- Principal risks include merger approval, execution and integration; possible changes in PlainsCapital’s performance; insurance pricing and demand; severe weather and catastrophe losses; reserve adequacy; reinsurance cost, availability and counterparty performance; insurer ratings and agent retention; and interest-rate and market movements. Management also identified execution of a new insurance IT system and maintenance of licenses as risks.
- Catastrophe reinsurance coverage was renewed for 2012, but the fifth layer was only 79% subscribed at June 30, leaving NLASCO with 21% participation in losses in that layer. Management reported that later renewal of the third through fifth layers provided fully subscribed coverage in two layers.
- Management stated that ordinary-course legal proceedings were not expected to have a material adverse effect. The filing reported no other-than-temporary investment impairments in the first half of 2012; the SWS loan and warrants were Level 3 valuations and were subject to significant unobservable-input and market-value risk.
- Management cautioned that interim results may not indicate full-year results. The filing provides no numerical earnings or revenue guidance.
Important facts for investors to verify
- Status and final terms of the PlainsCapital merger, including approvals, funding, transaction costs, dilution and any termination-fee exposure.
- Whether premium growth and improved combined ratios can continue, and how catastrophe frequency, non-catastrophe claims and reserve development affect underwriting results.
- Reinsurance recoverability, renewal pricing and the practical effect of catastrophe-layer participation and retention.
- Liquidity available at the parent after transaction funding, restrictions on subsidiary dividends, and cash-flow needs for claims and debt service.
- Valuation and performance of the SWS note and warrants, whose fair values depend on significant unobservable assumptions.