Hilltop Holdings Inc. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011; interim financial statements are unaudited. Hilltop is an acquisition-focused holding company whose operating business is property and casualty insurance through NLASCO and its insurance subsidiaries, National Lloyds and American Summit.
Key financial metrics
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenue | $36.5 million | $32.9 million | $71.2 million | $64.5 million |
| Net premiums earned | $32.6 million | $29.3 million | $63.5 million | $57.4 million |
| Net loss | $(13.2) million | $(2.6) million | $(11.8) million | $(2.1) million |
| Loss attributable to common stockholders | $(13.2) million | $(5.2) million | $(11.8) million | $(7.3) million |
| Basic and diluted loss per share | $(0.23) | $(0.09) | $(0.21) | $(0.13) |
- Underwriting: Q2 underwriting loss was $20.1 million versus $2.8 million; the combined ratio rose to 160.4% from 107.7%. For the first half, underwriting loss was $17.2 million versus $1.1 million, and the combined ratio increased to 125.6% from 100.0%. Ratios above 100% indicate underwriting losses.
- Cash flow: First-half operating cash flow was $0.1 million, versus $0.8 million in 2010. Investing activities used $10.4 million; financing cash flow was zero, compared with $5.2 million used for preferred dividends in 2010. Cash and cash equivalents declined $10.3 million to $639.2 million.
- Balance sheet and liquidity: At June 30, total assets were $947.5 million, liabilities $306.0 million, and stockholders’ equity $641.5 million. Cash and investments totaled about $798.4 million. Hilltop reported $138.4 million of notes payable, including $90.9 million fixed-rate and $47.5 million variable-rate debt; debt fair value was $137.3 million.
- Margins and investment income: First-half net investment income rose to $4.3 million from $3.5 million. The filing reports no consolidated operating margin measure; insurance combined ratios are the main underwriting measure.
Material changes and management commentary
- Premium growth reflected marketing, new homeowners products, additional agency relationships, and lower catastrophe reinsurance costs. First-half net premiums earned increased 10.6% year over year.
- Loss and loss adjustment expense rose $21.3 million in the first half. Management attributed the deterioration primarily to Texas wind and hail storms: five storms generated $14.6 million of incurred losses, with a further $7.1 million from 15 days of widespread severe weather. Q2 catastrophe losses that remained within the company’s retention contributed to elevated loss ratios.
- Management reported a $0.3 million prior-year reserve deficiency expense in Q2, related to late-reported 2010 claims in homeowners, liability, and fire and allied lines. Total loss reserves were $68.6 million at June 30, up from $58.9 million at year-end.
- NLASCO exited wind coverage along the Texas seacoast in March 2011 in response to catastrophe losses and higher reinsurance costs. Management said the company continues to emphasize disciplined underwriting.
- Hilltop reported approximately $599 million of parent-company cash at June 30 and continued to seek acquisitions or business combinations. On July 29, 2011, after quarter-end, it completed a $50 million loan to SWS Group. The loan bears 8% interest and has a five-year maturity; related warrants and investor rights are also part of the transaction.
Outlook, risks, and contingencies
- Management believed existing cash, investments, operating cash flows, and permitted insurance-subsidiary dividends would meet foreseeable liquidity needs, but said acquisitions could require external financing and financing might not be available.
- Key disclosed risks include severe weather and catastrophe exposure, reserve adequacy, reinsurance cost and availability and reinsurer performance, insurance demand and agent retention, maintaining A.M. Best ratings and licenses, and execution of acquisitions and integration. The insurers’ A.M. Best ratings were “A” at filing, and statutory capital and risk-based capital exceeded regulatory intervention thresholds.
- Reinsurance recoverables were $41.9 million with no allowance recorded. Reinsurance does not release NLASCO from its obligations to policyholders. For the upper catastrophe reinsurance layer renewed July 1, 2011, only 79% was subscribed, leaving NLASCO responsible for 21% of losses in that layer.
- Insurance-subsidiary dividends are subject to regulatory and contractual restrictions; approximately $11.9 million could be paid to NLASCO in 2011 without regulatory approval. The filing reported ordinary-course legal proceedings not expected to have a material adverse effect.
- Management cautioned that interim results may not indicate full-year results. The company reported effective disclosure controls and no material quarter-period change in internal control over financial reporting.
Important facts for investors to verify
- Whether catastrophe losses and reserve development persist, and how reserve estimates compare with subsequent claims experience.
- The amount and collectability of reinsurance recoverables, including the 21% unsubscribed upper catastrophe layer and the terms of future renewals.
- The SWS loan’s performance, collateral or other protections, and the value and dilution implications of its associated warrants.
- How much reported cash is available at the parent versus regulated insurance subsidiaries, and the practical effect of dividend restrictions on debt service and acquisitions.
- Debt terms and refinancing requirements: the filing lists principal commitments as due in 2015 and thereafter, but does not provide a clear detailed maturity schedule in the supplied text.