On Friday, ratings agency – A.M. Best Co. – asserted its debt and financial strength ratings on Hilltop Holdings Inc. (HTH - Analyst Report) and its subsidiaries with a stable outlook.
Accordingly, A.M. Best reiterated its issuer credit rating (ICR) of “bbb+” on Hilltop, reflecting adequate liquidity that is also favourable for mitigating any balance sheet risks. The ICR was previously assigned by A.M. Best in April 2010.
Simultaneously, the ratings agency also maintained the credibility of Hilltop’s subsidiaries by affirming the ICR of “a+” and “a” on National Lloyds Insurance Company (NLIC) and American Summit Insurance Company (ASIC), respectively. Besides, the financial strength rating (FSR) for both NLIC and ASIC were avowed at “A”, reflecting an excellent capital position.
The ratings of ASIC were previously upgraded in April 2010, followed by an annual affirmation on all of Hilltop and its subsidiaries in April last year. Both ASIC and NLIC are the affiliates of Hilltop’s primary wholly-acquired subsidiary NLASCO Inc., through which the company conducts its property and casualty operations in the US.
The ratings validate an adequate financial surplus position coupled with a favourable debt leverage outlook for Hilltop and its wings. Further, banking on the solid risk-adjusted balance sheet, healthy operating performance and capital leverage, the company assures strong earnings potential once the macro-economic risks subside. Besides, the company’s firm grasp on the local personal property insurance market adds value to Hilltop’s overall business in its operating areas.
Moreover, Hilltop’s risk-based capital (RBC) relating to insurance risk, asset credit risk, interest rate risk and business risk exceeds the level at which regulatory action would be required by the National Association of Insurance Commissioners (NAIC). These factors also pave the way for meaningful acquisitions and alliances for the long-term growth of the company.
Additionally, the $100 million share repurchase program, announced in November 2011, appears sustainable and bodes well for retaining confidence in the shareholders, also reflecting healthy capital deployment. Going ahead, Hilltop’s disciplined underwriting philosophy and expense management along with a better competitive position should continue to accelerate the top line in future.
However, these positives are partially offset by Hilltop’s exposure to the weather-risk prone areas such as Texas and Arizona, which increases the company’s claim ratios and taint their underwriting results as well. Nevertheless, the company is taking proactive steps at both NLIC and ASIC through cautious reinsurance programs in a effort to alleviate itself from catastrophe losses.
Hilltop reported net income attributable to common stockholders of $5.0 million or 9 cents per share in the fourth quarter of 2011, escalating from $1.0 million or 2 cents per share in the year-ago period and the Zacks Consensus Estimate of 2 cents per share.
Total revenue increased 21.3% year over year to $40.4 million, while total expenses inched up 0.3% year over year to $32.6 million. Results benefited from modest underwriting profitability, premiums growth, net realized gains and investment income that drove the top line. Even a lower-than-expected expense growth supported the bottom line.
Hilltop primarily competes with Capital Trust Inc. and American Realty Investors Inc. . Overall, based on Hilltop’s organised and structured growth strategy that more than offset the industry and weather-related risks, we maintain a long-term Outperform rating on the company. The Zacks Rank #1 on Hilltop further validates our long view and a short-term Strong Buy recommendation.