Higher Expenses Hurt Hilltop's 1Q - Analyst Blog
May 08 2012 - 5:00AM
Zacks
On Friday, Hilltop Holdings Inc. (HTH) filed
its 10-Q to report results for the quarter ending March 31, 2012.
For the first quarter of 2012, net income attributable to common
stockholders decreased to $0.3 million or 1 cent per share from
$1.4 million or 2 cents per share in the year-ago period. Earnings
per share also lagged the Zacks Consensus Estimate of 4 cents.
Results reflected higher premiums and investment income along
with improved net realized gains that drove the top line. However,
this growth was substantially offset by higher-than-expected
expenses, which in turn hampered the combined ratio and resulted in
operating cash outflow and underwriting loss during the reported
quarter.
During the reported quarter, Hilltop’s total revenue was $40.1
million, escalating 15.6% from $34.7 million in the year-ago
quarter, although it fells shy of the Zacks Consensus Estimate of
$41.0 million. The year-over-year upswing was primarily
attributable to a 13.9% increase in net premiums earned of $35.2
million and net investment income soaring 56.7% to $3.3 million.
Besides, other income improved 5.3% year over year to $1.7 million,
while net realized investment gains were almost at par with
prior-year quarter at $0.2 million.
Meanwhile, total expenses jumped 21.8% year over year to $39.6
million, primarily due to a 40.9% surge in loss and loss adjustment
expenses (LAE) along with a 7.8% increase in policy acquisition and
other underwriting expenses. These were partially offset by reduced
general and administration and depreciation and amortization
expenses along with lower interest expenses.
Besides, higher LAE and underwriting expenses also deteriorated
Hilltop’s combined ratio to 99.6% in the reported quarter from
89.0% in the year-ago quarter. Excluding catastrophic events,
combined ratios for the first quarters of 2012 and 2011 would have
been 96.1% and 87.0%, respectively.
Financial Update
Additionally, as on March 31, 2012, Hilltop had cash and cash
equivalents of $579.6 million (up from $578.5 million as on
December 31, 2011) and investments worth $219.4 million as compared
with $224.2 million at the end of 2011.
Total shareholder’s equity stood at $651.3 million at the end of
the reported quarter, down from $655.4 million at 2011-end. Total
assets inched down to $924.3 million at the end of the reported
quarter from $925.4 at 2011-end, while total liabilities decreased
to $273.0 million from $270.0 million at the end of 2011.
Furthermore, as on March 31, 2012, operating cash flow stood at
$2.6 million against $3.7 million at the end of year-ago quarter.
At March 2012-end, Hilltop had a deposit in custody for various
investments in State Insurance Departments with carrying values of
$9.4 million. Besides, the company repurchased 0.14 million shares
for about $1.2 million in a privately negotiated
transaction.
Our Take
While Hilltop remains sufficiently liquid, we believe management
will probably deploy the excess capital in acquiring other
insurance businesses to expand their operations and further improve
the top line. The company’s expanded distribution is also driving
growth of existing insurance products. However, the company’s
future performance will be dependent to a great extent upon the
prudent deployment of its reserves, even as the sole dependence on
subsidiary NLASCO continues to restrict its long-term growth.
Overall, we believe that Hilltop should continue to tread ahead
with its strategic approach in order to reduce expenses and
capitalize on the opportunities that the markets provide on
stabilization. We believe that the company should also be able to
strengthen its competitive position amid arch-rivals such as
MI Developments Inc. (MIM) and Capital
Trust Inc. (CT) once the markets rebound to improve
pricing and reverse the cyclical declines.
Hence, given the upside potential, we maintain a long-term
Outperform rating on the stock, with a Zacks Rank #1, which also
implies a short-term Buy recommendation.
CAPITAL TRUST-A (CT): Free Stock Analysis Report
HILLTOP HLDGS (HTH): Free Stock Analysis Report
MI DEVLPMNTS -A (MIM): Free Stock Analysis Report
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