On November 4, Hilltop Holdings Inc. (HTH) filed its 10-Q to report the third quarter 2010 results. Net loss attributable to common stockholders increased to $7.2 million or 13 cents per share from a net loss of $0.9 million or 2 cents per share in the year-ago period. This also compared unfavourably with the Zacks Consensus Estimate of a loss of 7 cents per share.
Results benefited from modest premiums growth and new channel distribution along with a swing to net realized gains against robust investment income that drove the top line. However, this growth was offset by higher-than-expected operating expenses that also hampered the combined ratio and resulted in a lower-than-expected operating cash flow.
During the reported quarter, Hilltop’s total revenue was $33.9 million, up from $32.7 million in the year-ago quarter and from the Zacks Consensus Estimate of $32.0 million. While net premiums earned increased 3.1% year over year to $30.1 million and net investment income grew 36.8% year over year to $2.0 million, other income declined 12.9% year over year to $1.6 million.
Further, direct premiums written increased 9.8% year over year to $35.4 million and net premium written grew 10.0% year over year to $30.7 million based on increased direct volumes, development of additional insurance products and lower reinsurance costs.
Total operating expenses increased 9.6% year over year to $33.0 million, primarily due to higher loss and loss adjustment expenses. Hilltop’s combined ratio deteriorated to 93.1% from 85.3% in the year-ago period on the back of higher losses from non−catastrophic claims and expenses.
Financials
As of September 30, 2010, Hilltop had investments of approximately $600.0 million (down from $729.6 million as on June 30, 2010) in overnight deposits at JPMorgan Chase & Co. (JPM), Merrill Lynch of Bank of America Corp. (BAC), Citibank of Citigroup Inc. (C) and Wells Fargo & Co. (WFC). These investments are in excess of the Federal Deposit Insurance Corporation (FDIC) insurance limit.
As of September 30, 2010, Hilltop had net operating loss carryforwards of $45.5 million expiring as follows: $18.0 million in 2023, $20.6 million in 2024 and $6.9 million in 2025.
Additionally, as on September 30, 2010, Hilltop had cash and equivalents of $643.4 million (down from $790.0 million as on December 31, 2009) and investments worth $150.6 million as compared to $130.0 million as on December 31, 2009. The fair value of debt outstanding was $138.4 million at the end of the reported quarter.
Further, as on September 30, 2010, cash provided by operations was $2.5 million as compared with $14.8 million as on September 30, 2009. The decline was primarily due to reduced net income, decrease in related party payable and decrease in income taxes receivable.
On July 20, 2010, Affordable Residential Communities LP, a wholly-owned subsidiary of Hilltop, announced the commencement of a “Put Right Purchase” offer for its 7.5% Senior Exchangeable Notes due 2025.
Going forward, management of Hilltop continues to explore possible strategic investment and acquisition opportunities with its available cash. For this purpose, the company also plans to secure the additional equity or debt financing sources, if required. While Hilltop remains sufficiently liquid, we believe that the sole dependence on subsidiary NLASCO continues to restrict its long-term growth.
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