We reiterated our Neutral recommendation on Hilltop Holdings Inc. (HTH) based on the critical sustainability factor. The company’s second quarter loss increased to $13.2 million or 23 cents per share from a loss of $5.2 million or 9 cents per share in the year-ago period. This also compared unfavorably with the Zacks Consensus Estimate of earnings of 2 cents per share.
Results benefited from modest growth in premiums, investment income and net realized gains that drove the top line. However, this growth was offset by higher-than-expected operating expenses and underwriting losses, which also influenced the deterioration of combined ratio.
Post restructuring, NLASCO remains the key driver for Hilltop's revenues. Besides, the company’s firm grip on the local personal property insurance market adds value to the overall Hilltop business in its operating areas. Improvement in premiums written in 2010 over 2009, coupled with other factors, has not only supported Hilltop’s top-line growth but also helped contract its operating losses from 2008 through 2010.
Despite the challenging operating environment, Hilltop’s balance sheet remained risk-free and fairly liquid. Moreover, Hilltop’s investment, debt and securities along with its subsidiaries are well poised in the market owing to their superior financial strength and credit ratings. This leaves excess capital and ample scope for more meaningful acquisitions and alliances for the company’s long-term growth.
However, Hilltop’s sole dependence on inorganic growth (from the NLASCO acquisition) continues to be a cause of concern for its long-term growth. The insurance industry is highly competitive and has historically been characterized by periods of significant price competition, particularly in the property and casualty segment.
The company’s vast exposure to the weather-risk prone areas such as Texas and Arizona increases Hilltop’s loss and loss adjustment expenses, which also deteriorates its claim ratios, combined ratio and underwriting expense ratios. Although the worst of the economic crisis is behind us, the ripples from the unfavorable market conditions still linger. The sluggish recovery, catastrophic losses and management’s inefficiency will likely restrict a significant rebound in the near future.
Therefore, we believe that Hilltop requires a more strategic approach in order to capitalize on the opportunities, which the markets offer on stabilization. Overall, Hilltop’s future performance will be dependent to a great extent upon the prudent deployment of its reserves. We thus expect the company to grow and evolve in the upcoming quarters by expanding its operations, which will thereby help us gain better visibility.
Weighing all the pros and cons, the Zacks Consensus Estimate of earnings for the third-quarter 2011 are currently pegged at 2 cents, up from a loss of 13 cents in the year-ago quarter. However, for 2011, loss is estimated to be 17 cents, down from 24 cents in 2009.
Additionally, the quantitative Zacks Rank for Hilltop is currently #3, indicating no clear directional pressure on the shares over the near term.
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