Hilltop Breaks Even in 3Q

On November 4, Hilltop Holdings Inc. (HTH - Analyst Report) filed its 10-Q to report results for the quarter ending September 30, 2011. For the third quarter of 2011, net income attributable to common stockholders increased to $.25 million breaking even on per share basis from a loss of $7.2 million or 13 cents in the year-ago period. This also compared favourably with the Zacks Consensus Estimate of loss of 22 cents.

Results benefited from modest underwriting profitability, premiums growth, net realized gains and investment income that drove the top line. However, this growth was offset by higher-than-expected expenses, which in turn hampered the combined ratio and resulted in operating cash outflow.

During the reported quarter, Hilltop’s total revenue was $40.6 million, escalating 19.8% from $33.9 million in the year-ago quarter, and exceeding the Zacks Consensus Estimate of $38.0 million.

The upswing was primarily attributable to a 15.9% year-over-year increase in net premiums earned of $34.9 million and 55% higher net investment income of $3.1 million. Besides, other income increased 7.4% year over year to $1.8 million, while net realized investment gains surged to $0.8 million against $0.09 million in the year-ago quarter.

However, total expenses jumped 26.4% year over year to $41.7 million, primarily due to higher loss and loss adjustment expenses, policy acquisition and other underwriting expenses coupled with higher general and administrative expenses.

Besides, higher expenses also lowered Hilltop’s combined ratio to 99.6% in the reported quarter from 93.1% in the year-ago quarter. Excluding catastrophic events, combined ratios for the third quarters of 2011 and 2010 would have been 89.3% and 89.0%, respectively, yet higher than management’s target of 85.0%.

Financials

Additionally, as on September 30, 2011, Hilltop had cash and cash equivalents of $584.1 million (down from $649.4 million as on December 31, 2010) and investments worth $212.6 million as compared with $149.0 million as on December 31, 2010.

Furthermore, as on September 30, 2011, cash used in operating activities was $4.0 million as compared with cash provided by operating activities of $2.5 million as on September 30, 2010.

Share Repurchase Update

On November 2, 2011, the board of Hilltop sanctioned a share repurchase plan that authorizes the purchase of common stock up to $100 million. While the repurchases will be initiated through open market operations, depending on the market conditions, the program is scheduled to expire on November 1, 2012.

While Hilltop remains sufficiently liquid, we believe management will probably deploy the excess capital in acquiring other insurance businesses to expand their operations. 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 capitalize on the opportunities that the markets would provide on stabilization.

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