Hilltop Holdings Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; balance-sheet comparisons are to December 31, 2011. Figures are unaudited. Hilltop is a holding company pursuing opportunistic acquisitions and operates property-and-casualty insurers National Lloyds and American Summit, focused primarily on homeowners, fire, and manufactured-home coverage.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 / prior date |
|---|---|---|
| Total revenue | $40.1 million | $34.7 million |
| Net premiums earned | $35.2 million | $30.9 million |
| Net investment income | $3.3 million | $2.1 million |
| Net income attributable to common stockholders | $0.3 million; $0.01 per share | $1.4 million; $0.02 per share |
| Operating cash flow | $2.6 million | $3.7 million |
| Cash and cash equivalents | $579.6 million | $578.5 million at Dec. 31, 2011 |
| Total investments | $219.5 million | $224.2 million at Dec. 31, 2011 |
| Total assets | $924.3 million | $925.4 million at Dec. 31, 2011 |
| Total liabilities / notes payable | $273.0 million / $131.5 million | $270.0 million / $131.5 million at Dec. 31, 2011 |
| Stockholders’ equity | $651.3 million | $655.4 million at Dec. 31, 2011 |
Revenue increased 15.8%, while net income fell about 76%. The insurance underwriting result was a $0.3 million loss, versus a $2.9 million gain a year earlier. The combined ratio rose to 99.6% from 89.0% (a higher ratio indicates weaker underwriting results); the loss and loss-adjustment-expense ratio increased to 64.1% from 51.7%, while the expense ratio excluding agency expenses improved to 35.5% from 37.3%.
Comprehensive loss was $3.1 million, compared with comprehensive income of $1.0 million, principally reflecting $3.4 million of after-tax unrealized losses on available-for-sale securities. Cash increased by $1.1 million during the quarter; investing activities used $0.3 million and financing activities used $1.2 million, including the stock repurchase.
Changes, commentary, outlook, and risks
- Premium growth reflected higher written volume and distribution, with net premiums earned up 13.7%. Net investment income rose $1.2 million, including income from Hilltop’s SWS investment and higher yields on cash balances.
- Loss and LAE expense increased $6.5 million. Management attributed the increase to $4.4 million of more severe 2012 accident-year storm activity and $2.1 million of adverse development from late-reported 2011 accident-year claims. Retained catastrophe losses were $1.2 million versus $0.7 million in Q1 2011.
- Hilltop reported approximately $528 million of parent-company cash available for potential acquisitions, within consolidated cash of $579.6 million; approximately $52 million of consolidated cash was held by NLASCO and its subsidiaries. Management said cash, investments, operating cash flows, and permitted insurance-subsidiary dividends should meet foreseeable liquidity needs, while noting acquisitions could require external financing. No specific earnings or revenue guidance was provided.
- Insurance-subsidiary dividends are restricted by Texas regulation and debt agreements; approximately $11.9 million could be paid to NLASCO in 2012 without regulatory approval. The insurers reported statutory surplus above minimum requirements and RBC ratios above intervention levels. Their A.M. Best “A” ratings were confirmed March 30, 2012, but may be revised or withdrawn.
- Reinsurance recoverables were $25.9 million with no allowance recorded. Reinsurance does not release the insurers from policyholder obligations, and reinsurer failure remains a risk. The fifth catastrophe-reinsurance layer was only 79% subscribed, leaving NLASCO responsible for 21% of losses in that layer.
- Management recorded no other-than-temporary investment impairments. Level 3 investments—the SWS term loan and warrants—totaled $56.6 million and depend on significant unobservable valuation inputs. Management cautioned that worsening markets could reduce investment values and earnings.
- Other disclosed risks include severe regional catastrophes, reserve adequacy, reinsurance cost and availability, insurance demand and agent retention, A.M. Best ratings, acquisition execution and integration, interest rates, capital markets, and the insurance IT-system implementation. The company reported ordinary-course legal matters not expected to materially adversely affect consolidated results.
Important facts for investors to verify
- Whether elevated storm losses and unfavorable prior-year reserve development persist, and how subsequent claims experience affects reserves.
- Whether premium growth can be sustained while maintaining underwriting discipline and improving the combined ratio.
- Parent-level versus insurance-subsidiary cash availability, dividend restrictions, and the funding needed for any acquisition.
- Reinsurer collectability and the effect of the partially subscribed catastrophe layer on potential net losses.
- Valuation sensitivity of the SWS loan and warrants, and changes in unrealized investment gains or losses.
- Debt terms and variable-rate exposure: the filing reports $131.5 million of debt, including $47.5 million at variable rates; it estimates a 0.125% rate increase would raise annual interest expense by about $59,000.