We reiterated our ‘Neutral’ recommendation on Hilltop Holdings Inc. (HTH) based on the critical sustainability factor. The company’s first quarter earnings increased to $1.4 million or 2 cents per share from a loss of $2.1 million or 4 cents per share in the year-ago period. This, however, compared favorably with the Zacks Consensus Estimate earnings of 1 cent per share.
Results benefited from modest premium growth and investment income that drove the top line and operating cash flow. Nevertheless, this growth was offset by lower-than-expected net realized gains and higher-than-expected operating expenses, although the combined ratio witnessed improvement.
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.
Additionally, Hilltop holds a comfortable position as per the regulatory requirement of the Texas Department of Insurance. As of March 31, 2011, the company’s insurance subsidiaries had a statutory surplus in excess of the minimum amount required. Moreover, the company’s risk-based capital (RBC) relating to insurance risk, asset credit risk, interest rate risk and business risk exceeded the level at which the National Association of Insurance Commissioners would entail regulatory action.
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 & Casualty segment.
The company’s vast exposure to the weather-risk prone areas, such as Texas, increases Hilltop’s loss and loss adjustment expenses, which deteriorate 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.
Although the company has witnessed growth in the second consecutive quarter, we believe that Hilltop should continue to tread ahead with its 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.
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