XNYS:HTH Hilltop Holdings Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark One)

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2012

 

OR

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number: 1-31987

 

Hilltop Holdings Inc.

(Exact name of registrant as specified in its charter)

 

MARYLAND

 

84-1477939

(State or other jurisdiction of incorporation or
organization)

 

(I.R.S. Employer Identification No.)

 

200 Crescent Court, Suite 1330

 

 

Dallas, Texas

 

75201

(Address of principal executive offices)

 

(Zip Code)

 

(214) 855-2177

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

 

The number of shares of the Registrant’s common stock outstanding at August 6, 2012 was 56,363,647.

 

 

 



Table of Contents

 

HILLTOP HOLDINGS INC.

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2012

 

Item

 

Description

 

Page

 

 

 

 

 

 

 

PART I — FINANCIAL INFORMATION

 

 

 

 

 

 

 

1.

 

Financial Statements

 

 

 

 

Consolidated Balance Sheets as of June 30, 2012 (unaudited) and December 31, 2011

 

3

 

 

Consolidated Statements of Comprehensive Income for the Three and Six Months ended June 30, 2012 and 2011 (unaudited)

 

4

 

 

Consolidated Statement of Stockholders’ Equity for the Six Months ended June 30, 2012 (unaudited)

 

5

 

 

Consolidated Statements of Cash Flows for the Six Months ended June 30, 2012 and 2011 (unaudited)

 

6

 

 

Notes to Consolidated Financial Statements (unaudited)

 

7

 

 

 

 

 

2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

21

 

 

 

 

 

3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

33

 

 

 

 

 

4.

 

Controls and Procedures

 

34

 

 

 

 

 

 

 

PART II — OTHER INFORMATION

 

 

1A.

 

Risk Factors

 

34

 

 

 

 

 

6.

 

Exhibits

 

34

 

2



Table of Contents

 

HILLTOP HOLDINGS INC.

CONSOLIDATED BALANCE SHEETS

AS OF JUNE 30, 2012 AND DECEMBER 31, 2011

(in thousands, except share and per share data)

(unaudited)

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

Assets

 

 

 

 

 

Investments

 

 

 

 

 

Fixed maturities

 

 

 

 

 

Available for sale securities, at fair value (amortized cost of $132,049 and $135,166, respectively)

 

$

141,687

 

$

144,801

 

Equity securities

 

 

 

 

 

Available for sale securities, at fair value (cost of $19,008 and $16,813, respectively)

 

19,610

 

19,022

 

Other investments

 

 

 

 

 

Note receivable, at fair value (amortized cost of $39,540 and $38,641, respectively)

 

40,672

 

38,588

 

Warrants, at fair value (cost of $12,068 and $12,068, respectively)

 

13,905

 

21,789

 

Total investments

 

215,874

 

224,200

 

 

 

 

 

 

 

Cash and cash equivalents

 

576,412

 

578,520

 

Accrued interest and dividends

 

1,494

 

1,576

 

Premiums receivable

 

26,792

 

24,390

 

Deferred acquisition costs

 

20,631

 

19,182

 

Reinsurance recoverable, net of uncollectible amounts

 

23,135

 

25,861

 

Prepaid reinsurance premiums

 

3,189

 

5,056

 

Income taxes receivable

 

77

 

77

 

Deferred income taxes

 

16,300

 

8,354

 

Goodwill

 

23,988

 

23,988

 

Intangible assets, definite life

 

5,490

 

6,074

 

Intangible assets, indefinite life

 

3,000

 

3,000

 

Property and equipment, net

 

2,115

 

2,128

 

Loan origination costs, net

 

2,380

 

2,471

 

Other assets

 

1,221

 

548

 

Total assets

 

$

922,098

 

$

925,425

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Liabilities

 

 

 

 

 

Reserve for losses and loss adjustment expenses

 

$

52,087

 

$

44,835

 

Unearned premiums

 

86,634

 

80,661

 

Reinsurance payable

 

3,057

 

2,845

 

Accounts payable and accrued expenses

 

7,293

 

8,121

 

Notes payable

 

131,450

 

131,450

 

Other liabilities

 

2,851

 

2,130

 

Total liabilities

 

283,372

 

270,042

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

Common stock, $.01 par value, 100,000,000 shares authorized, 56,362,273 and 56,500,828 shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively

 

564

 

565

 

Additional paid-in capital

 

917,299

 

918,192

 

Accumulated other comprehensive income

 

8,586

 

13,983

 

Accumulated deficit

 

(287,723

)

(277,357

)

Total stockholders’ equity

 

638,726

 

655,383

 

Total liabilities and stockholders’ equity

 

$

922,098

 

$

925,425

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

3



Table of Contents

 

HILLTOP HOLDINGS INC.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2012 AND 2011

(in thousands, except per share data)

(unaudited)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Revenue:

 

 

 

 

 

 

 

 

 

Net premiums earned

 

$

36,195

 

$

32,568

 

$

71,350

 

$

63,500

 

Net investment income

 

3,223

 

2,229

 

6,482

 

4,310

 

Other income

 

1,851

 

1,723

 

3,562

 

3,348

 

Net realized gains on investments

 

 

 

 

 

 

 

 

 

Other realized investment gains, net

 

17

 

12

 

38

 

31

 

Total realized investment gains, net

 

17

 

12

 

38

 

31

 

Total revenue

 

41,286

 

36,532

 

81,432

 

71,189

 

Expenses:

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses

 

39,071

 

41,101

 

61,613

 

57,105

 

Policy acquisition and other underwriting expenses

 

12,793

 

11,597

 

25,708

 

23,582

 

General and administrative expenses

 

2,913

 

1,612

 

4,557

 

3,485

 

Depreciation and amortization

 

330

 

426

 

690

 

858

 

Interest expense

 

2,131

 

2,245

 

4,270

 

4,421

 

Total expenses

 

57,238

 

56,981

 

96,838

 

89,451

 

 

 

 

 

 

 

 

 

 

 

Loss before income tax benefit

 

(15,952

)

(20,449

)

(15,406

)

(18,262

)

Income tax benefit

 

5,243

 

7,216

 

5,040

 

6,439

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to common stockholders

 

$

(10,709

)

$

(13,233

)

$

(10,366

)

$

(11,823

)

 

 

 

 

 

 

 

 

 

 

Loss per share attributable to common stockholders

 

 

 

 

 

 

 

 

 

Basic loss per share

 

$

(0.19

)

$

(0.23

)

$

(0.18

)

$

(0.21

)

Diluted loss per share

 

$

(0.19

)

$

(0.23

)

$

(0.18

)

$

(0.21

)

 

 

 

 

 

 

 

 

 

 

Weighted average share information

 

 

 

 

 

 

 

 

 

Basic shares outstanding

 

56,362

 

56,498

 

56,431

 

56,497

 

Diluted shares outstanding

 

56,362

 

56,498

 

56,431

 

56,497

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income, before tax

 

 

 

 

 

 

 

 

 

Unrealized (losses) gains on available-for-sale securities

 

(3,071

)

918

 

(8,303

)

288

 

Income tax benefit (expense)

 

1,075

 

(321

)

2,906

 

(101

)

Other comprehensive (loss) income, net of tax

 

(1,996

)

597

 

(5,397

)

187

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss attributable to common stockholders

 

$

(12,705

)

$

(12,636

)

$

(15,763

)

$

(11,636

)

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

4



Table of Contents

 

HILLTOP HOLDINGS INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2012

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Other

 

 

 

Total

 

 

 

Common Stock

 

Paid-in

 

Comprehensive

 

Accumulated

 

Stockholders’

 

 

 

Shares

 

Amount

 

Capital

 

Income

 

Deficit

 

Equity

 

Balance, December 31, 2011

 

56,501

 

$

565

 

$

918,192

 

$

13,983

 

$

(277,357

)

$

655,383

 

Net loss

 

 

 

 

 

 

 

 

 

(10,366

)

(10,366

)

Other comprehensive loss, net of tax benefit of $2,906

 

 

 

 

 

 

 

(5,397

)

 

 

(5,397

)

Total comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(15,763

)

Common stock issued to board members

 

2

 

 

 

24

 

 

 

 

 

24

 

Repurchase of common stock

 

(141

)

(1

)

(1,161

)

 

 

 

 

(1,162

)

Stock compensation expense

 

 

 

 

 

244

 

 

 

 

 

244

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, June 30, 2012

 

56,362

 

$

564

 

$

917,299

 

$

8,586

 

$

(287,723

)

$

638,726

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

5



Table of Contents

 

HILLTOP HOLDINGS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2012 AND 2011

(in thousands)

(unaudited)

 

 

 

For the Six Months Ended June 30,

 

 

 

2012

 

2011

 

Cash flow from operating activities:

 

 

 

 

 

Net loss

 

$

(10,366

)

$

(11,823

)

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

690

 

858

 

Increase in deferred income taxes

 

(5,040

)

(6,320

)

Increase in unearned premiums

 

5,973

 

9,304

 

Increase in deferred acquisition costs

 

(1,449

)

(2,380

)

Realized gains on investments

 

(38

)

(31

)

Amortization of loan origination costs

 

91

 

98

 

Stock grant compensation expense

 

268

 

34

 

Decrease in payable to related party

 

 

(263

)

Increase in income taxes payable

 

 

21

 

Increase in premiums receivable

 

(2,402

)

(3,103

)

Decrease in reinsurance recoverables

 

2,726

 

3,734

 

Increase in loss and loss adjustment expense reserves

 

7,252

 

9,734

 

Changes in other operating assets and liabilities

 

723

 

226

 

Net cash (used in) provided by operating activities

 

$

(1,572

)

$

89

 

 

 

 

 

 

 

Cash flow from investing activities:

 

 

 

 

 

Purchases of available-for-sale securities

 

$

(2,717

)

$

(16,321

)

Proceeds from sales of available-for-sale securities

 

2,075

 

2,392

 

Proceeds from maturities of available-for-sale securities

 

1,361

 

3,803

 

Purchases of fixed assets

 

(93

)

(242

)

Net cash provided by (used in) investing activities

 

$

626

 

$

(10,368

)

 

 

 

 

 

 

Cash flow from financing activities:

 

 

 

 

 

Repurchase of common stock

 

$

(1,162

)

$

 

Net cash used in financing activities

 

$

(1,162

)

$

 

Net decrease in cash and cash equivalents

 

(2,108

)

(10,279

)

Cash and cash equivalents, beginning of period

 

578,520

 

649,439

 

Cash and cash equivalents, end of period

 

$

576,412

 

$

639,160

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Cash paid for interest

 

$

4,180

 

$

4,386

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

6



Table of Contents

 

HILLTOP HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

(unaudited)

 

1.              Business, Basis of Presentation and Summary of Significant Accounting Policies

 

Business

 

Hilltop Holdings Inc. is a holding company that is endeavoring to make opportunistic acquisitions or effect a business combination.  In connection with this strategy, on May 8, 2012, we entered into a definitive agreement and plan of merger with PlainsCapital Corporation.  In accordance with the merger agreement, PlainsCapital Corporation will become a wholly owned subsidiary of us.  The purchase consideration to PlainsCapital Corporation shareholders includes approximately 27.5 million shares of our common stock and approximately $318 million of cash.  Consummation of the merger is subject to certain closing conditions, including approval of PlainsCapital Corporation’s and our respective shareholders and regulatory approvals.  No assurance can be given at this time as to when or if this transaction will be consummated.

 

We also conduct operations in the property and casualty insurance industry through our insurance subsidiaries, National Lloyds Insurance Company, or NLIC, and American Summit Insurance Company, or ASIC.  National Lloyds Insurance Company commenced business in 1949 and currently operates in 14 states, with its largest market being the State of Texas.  American Summit Insurance Company was formed in 1955 and currently operates in 12 states, its largest market being the State of Arizona.  Both of these insurance companies carry a financial strength rating of “A” (Excellent) by A.M. Best, which was confirmed on March 30, 2012, and are regulated by the Texas Department of Insurance.  Our products include fire and homeowners insurance to low value dwellings and manufactured homes primarily in Texas and other areas of the south, southeastern and southwestern United States.

 

Our common stock is listed on the New York Stock Exchange under the symbol “HTH”.  We have no public trading history prior to February 12, 2004.

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America (“GAAP”), and in conformity with the rules and regulations of the Securities and Exchange Commission.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP, however, have been condensed or omitted pursuant to Article 10 of Regulation S-X.  The consolidated financial statements include the accounts of all wholly-owned subsidiaries of the Company.  All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements.

 

In the opinion of management, these financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments necessary for the fair statement of the Company’s financial position, results of operations and cash flows. These adjustments were of a normal, recurring nature. The results of operations for the interim periods ended June 30, 2012 may not be indicative of the results that may be expected for the year ended December 31, 2012. These financial statements should be read in conjunction with the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2011.

 

We are required by GAAP to make estimates and assumptions that affect our reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of our financial statements and our reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates. These estimates and assumptions are particularly important in determining reserves for losses and loss adjustment expenses, deferred policy acquisition costs, reinsurance receivables and potential impairment of assets.

 

7



Table of Contents

 

HILLTOP HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

(unaudited)

 

Summary of Significant Accounting Policies

 

Recently Adopted Accounting Pronouncements

 

In October 2010, the FASB issued ASU-2010-26 to address the diversity in practice for the accounting for costs associated with acquiring or renewing insurance contracts.  This guidance modifies the definition of acquisition costs to specify that a cost must be directly related to the successful acquisition of a new or renewal insurance contract in order to be deferred. If application of this guidance would result in the capitalization of acquisition costs that had not previously been capitalized by a reporting entity, the entity may elect not to capitalize those costs.  The updated guidance is effective for periods beginning after December 15, 2011. The Company adopted this guidance prospectively on January 1, 2012, and it had no material impact on the Company’s financial statements.

 

In May 2011, the FASB issued ASU-2011-04 to clarify ASC 820 and in some instances changed particular principles or requirements for measuring fair value or disclosing information about fair value measurements.  The amendments in this update result in common fair value measurement and disclosure requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”).  This updated guidance is effective for periods beginning after December 15, 2011. The adoption of this guidance on January 1, 2012 did not have a material impact on the Company’s financial statements.

 

In June 2011, the FASB issued ASU-2011-05, which eliminates the current option to report other comprehensive income and its components in the statement of changes in equity.  The new standard allows companies to report net income and other comprehensive income in a single, continuous statement, or in two separate, but consecutive statements.  The statement(s) would need to be presented with equal prominence as the other primary financial statements.  This updated guidance is effective for periods beginning after December 15, 2011. The adoption of this guidance on January 1, 2012 changed our current presentation of other comprehensive income; however, it did not have a material impact on the Company’s financial statements.

 

In December 2011, the FASB issued ASU-2011-12, which amended ASU-2011-05 and defers guidance related to the presentation of reclassification adjustments out of accumulated other comprehensive income.  All other requirements presented in ASU-2011-05 are not affected by this Update.  This updated guidance is effective for periods beginning after December 15, 2011. The adoption of this guidance on January 1, 2012 changed our current presentation of other comprehensive income; however, it did not have a material impact on the Company’s financial statements.

 

8



Table of Contents

 

HILLTOP HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

(unaudited)

 

2.              Investments

 

The amortized cost (original cost for equity securities), gross unrealized holding gains and losses, and fair value of available-for-sale securities by major security type and class of security at June 30, 2012 and December 31, 2011 were as follows (in thousands).

 

 

 

June 30, 2012

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

 

 

Unrealized

 

Unrealized

 

 

 

 

 

Cost/Amortized

 

Holding

 

Holding

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

Fixed maturities:

 

 

 

 

 

 

 

 

 

Government securities

 

$

27,756

 

$

1,270

 

$

(1

)

$

29,025

 

Residential mortgage-backed securities

 

10,373

 

797

 

 

11,170

 

Commercial mortgage-backed securities

 

1,969

 

64

 

 

2,033

 

Corporate debt securities

 

91,951

 

7,574

 

(66

)

99,459

 

 

 

132,049

 

9,705

 

(67

)

141,687

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

19,008

 

608

 

(6

)

19,610

 

 

 

151,057

 

10,313

 

(73

)

161,297

 

 

 

 

 

 

 

 

 

 

 

Other investments:

 

 

 

 

 

 

 

 

 

Note receivable

 

39,540

 

1,132

 

 

40,672

 

Warrants

 

12,068

 

1,837

 

 

13,905

 

 

 

$

202,665

 

$

13,282

 

$

(73

)

$

215,874

 

 

 

 

December 31, 2011

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

 

 

Unrealized

 

Unrealized

 

 

 

 

 

Cost/Amortized

 

Holding

 

Holding

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

Fixed maturities:

 

 

 

 

 

 

 

 

 

Government securities

 

$

27,729

 

$

1,439

 

$

(3

)

$

29,165

 

Residential mortgage-backed securities

 

11,708

 

944

 

 

12,652

 

Commercial mortgage-backed securities

 

2,277

 

36

 

(10

)

2,303

 

Corporate debt securities

 

93,452

 

7,406

 

(177

)

100,681

 

 

 

135,166

 

9,825

 

(190

)

144,801

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

16,813

 

2,462

 

(253

)

19,022

 

 

 

151,979

 

12,287

 

(443

)

163,823

 

 

 

 

 

 

 

 

 

 

 

Other investments:

 

 

 

 

 

 

 

 

 

Note receivable

 

38,641

 

 

(53

)

38,588

 

Warrants

 

12,068

 

9,721

 

 

21,789

 

 

 

$

202,688

 

$

22,008

 

$

(496

)

$

224,200

 

 

9



Table of Contents

 

HILLTOP HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

(unaudited)

 

The following tables summarize the length of time securities with unrealized losses at June 30, 2012 and December 31, 2011 have been in an unrealized loss position (in thousands).

 

 

 

June 30, 2012

 

 

 

Less than 12 Months

 

12 Months or More

 

Total

 

 

 

Estimated

 

Gross

 

Estimated

 

Gross

 

Estimated

 

Gross

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

 

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Government securities

 

$

398

 

$

(1

)

$

 

$

 

$

398

 

$

(1

)

Corporate debt securities

 

720

 

(37

)

1,723

 

(29

)

2,443

 

(66

)

 

 

1,118

 

(38

)

1,723

 

(29

)

2,841

 

(67

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

 

 

93

 

(6

)

93

 

(6

)

 

 

$

1,118

 

$

(38

)

$

1,816

 

$

(35

)

$

2,934

 

$

(73

)

 

 

 

December 31, 2011

 

 

 

Less than 12 Months

 

12 Months or More

 

Total

 

 

 

Estimated

 

Gross

 

Estimated

 

Gross

 

Estimated

 

Gross

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

 

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Government securities

 

$

1,695

 

$

(3

)

$

 

$

 

$

1,695

 

$

(3

)

Commercial mortgage-backed securities

 

487

 

(10

)

 

 

487

 

(10

)

Corporate debt securities

 

5,254

 

(177

)

 

 

5,254

 

(177

)

 

 

7,436

 

(190

)

 

 

7,436

 

(190

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

8,476

 

(253

)

 

 

8,476

 

(253

)

 

 

15,912

 

(443

)

 

 

15,912

 

(443

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other investments

 

 

 

 

 

 

 

 

 

 

 

 

 

Note receivable

 

38,588

 

(53

)

 

 

38,588

 

(53

)

 

 

$

54,500

 

$

(496

)

$

 

$

 

$

54,500

 

$

(496

)

 

For the three and six months ended June 30, 2012, the Company did not record any other-than-temporary impairments.  While all of the investments are monitored for potential other-than-temporary impairment, our analysis and experience indicate that these investments generally do not present a greater risk of other-than-temporary impairment, as fair value should recover over time.  Factors considered in our analysis include the reasons for the unrealized loss position, the severity and duration of the unrealized loss position, credit worthiness, and forecasted performance of the investee.  While some of the securities held in the investment portfolio have decreased in value since the date of acquisition, the severity of loss and the duration of the loss position are not believed to be significant enough to warrant other-than-temporary impairment of the securities.  The Company does not intend, nor is it likely that the Company will be required to sell these securities before the recovery of the cost basis; and, therefore, we do not believe any other-than-temporary impairments exist as of June 30, 2012.

 

10



Table of Contents

 

HILLTOP HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

(unaudited)

 

Gross realized investment gains and losses for the three and six months ended June 30, 2012 and 2011 are summarized as follows (in thousands).

 

 

 

Three Months Ended June 30,

 

 

 

2012

 

2011

 

 

 

Gross

 

Gross

 

 

 

Gross

 

Gross

 

 

 

 

 

Gains

 

Losses

 

Total

 

Gains

 

Losses

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities

 

$

19

 

$

(2

)

$

17

 

$

13

 

$

(1

)

$

12

 

 

 

$

19

 

$

(2

)

$

17

 

$

13

 

$

(1

)

$

12

 

 

 

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

 

 

Gross

 

Gross

 

 

 

Gross

 

Gross

 

 

 

 

 

Gains

 

Losses

 

Total

 

Gains

 

Losses

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities

 

$

40

 

$

(2

)

$

38

 

$

33

 

$

(2

)

$

31

 

 

 

$

40

 

$

(2

)

$

38

 

$

33

 

$

(2

)

$

31

 

 

Sale of available-for-sale investment securities resulted in the following during the three and six months ended June 30, 2012 and 2011 (in thousands).

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Proceeds

 

$

1,080

 

$

877

 

$

2,075

 

$

2,392

 

 

 

 

 

 

 

 

 

 

 

Gross gains

 

$

19

 

$

13

 

$

40

 

$

33

 

 

 

 

 

 

 

 

 

 

 

Gross losses

 

$

(2

)

$

(1

)

$

(2

)

$

(2

)

 

11



Table of Contents

 

HILLTOP HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

(unaudited)

 

Expected maturities may differ from contractual maturities because certain borrowers may have the right to call or prepay obligations with or without penalties.  The schedule of fixed maturities of available-for-sale securities at June 30, 2012 and December 31, 2011, by contractual maturity are as follows (in thousands).

 

 

 

June 30, 2012

 

 

 

Amortized

 

Fair

 

 

 

Cost

 

Value

 

Available-for-sale fixed maturities:

 

 

 

 

 

Due within one year

 

$

28,682

 

$

29,156

 

Due after one year through five years

 

53,382

 

56,644

 

Due six years through ten years

 

36,728

 

41,729

 

Due after ten years

 

915

 

955

 

Mortgage-backed securities

 

12,342

 

13,203

 

 

 

$

132,049

 

$

141,687

 

 

 

 

 

 

 

Other investments:

 

 

 

 

 

Due after one year through five years

 

$

51,608

 

$

54,577

 

 

 

$

51,608

 

$

54,577

 

 

 

 

 

December 31, 2011

 

 

 

Amortized

 

Fair

 

 

 

Cost

 

Value

 

Available-for-sale fixed maturities:

 

 

 

 

 

Due within one year

 

$

12,608

 

$

12,942

 

Due after one year through five years

 

69,594

 

73,300

 

Due six years through ten years

 

38,065

 

42,766

 

Due after ten years

 

914

 

838

 

Mortgage-backed securities

 

13,985

 

14,955

 

 

 

$

135,166

 

$

144,801

 

 

 

 

 

 

 

Other investments:

 

 

 

 

 

Due after one year through five years

 

$

50,709

 

$

60,377

 

 

 

$

50,709

 

$

60,377

 

 

Net investment income for the three and six months ended June 30, 2012 and 2011 is as follows (in thousands).

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

Change

 

2012

 

2011

 

Change

 

Cash equivalents

 

$

206

 

$

602

 

$

(396

)

$

389

 

$

1,219

 

$

(830

)

Fixed maturities

 

1,977

 

1,587

 

390

 

3,958

 

3,023

 

935

 

Equity securities

 

166

 

168

 

(2

)

357

 

331

 

26

 

Other Investments

 

1,000

 

 

1,000

 

2,000

 

 

2,000

 

 

 

3,349

 

2,357

 

992

 

6,704

 

4,573

 

2,131

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment expense

 

(126

)

(128

)

2

 

(222

)

(263

)

41

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net investment income

 

$

3,223

 

$

2,229

 

$

994

 

$

6,482

 

$

4,310

 

$

2,172

 

 

At June 30, 2012, the Company had investments with carrying values totaling $9.4 million on deposit with various state insurance departments.

 

12



Table of Contents

 

HILLTOP HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

(unaudited)

 

3.              Fair Value Measurements

 

The Company’s estimates of fair value for financial assets and financial liabilities are based on the framework established in ASC 820, Fair Value Measurements and Disclosures. The framework is based on the inputs used in valuation and gives the highest priority to quoted prices in active markets.  It also requires that observable inputs be used in the valuations, when available. The disclosure of fair value estimates is based on whether the significant inputs into the valuation are observable. In determining the level of the hierarchy in which the estimate is disclosed, the highest priority is given to unadjusted quoted prices in active markets and the lowest priority to unobservable inputs that reflect the Company’s significant market assumptions. The three levels of the hierarchy are as follows:

 

·                 Level 1 - Unadjusted quoted market prices for identical assets or liabilities in active markets that the Company has the ability to access.

 

·                 Level 2 - Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; or valuations based on models where the significant inputs are observable (e.g., interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data.  Based on management’s understanding of the methodologies used by our pricing service, all applicable investments have been valued in accordance with GAAP valuation principles.

 

·                 Level 3 - Valuations based on models where significant inputs are not observable. The unobservable inputs reflect the Company’s own assumptions about the assumptions that market participants would use.

 

13



Table of Contents

 

HILLTOP HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

(unaudited)

 

The following tables present the hierarchy of inputs used by the Company by financial asset type to determine their fair values at June 30, 2012 and December 31, 2011 (in thousands).

 

 

 

As of June 30, 2012

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

576,412

 

$

576,412

 

$

 

$

 

Fixed maturities

 

 

 

 

 

 

 

 

 

Government securities

 

29,025

 

 

29,025

 

 

Residential mortgage-backed securities

 

11,170

 

 

11,170

 

 

Commercial mortgage-backed securities

 

2,033

 

 

2,033

 

 

Corporate debt securities

 

99,459

 

 

99,459

 

 

Equity securities

 

 

 

 

 

 

 

 

 

Common stock

 

17,202

 

17,202

 

 

 

Non-redeemable preferred stock

 

2,408

 

2,408

 

 

 

Other investments

 

 

 

 

 

 

 

 

 

Note receivable

 

40,672

 

 

 

40,672

 

Warrants

 

13,905

 

 

 

13,905

 

Total

 

$

792,286

 

$

596,022

 

$

141,687

 

$

54,577

 

 

 

 

As of December 31, 2011

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

578,520

 

$

578,520

 

$

 

$

 

Fixed maturities

 

 

 

 

 

 

 

 

 

Government securities

 

29,165

 

 

29,165

 

 

Residential mortgage-backed securities

 

12,652

 

 

12,652

 

 

Commercial mortgage-backed securities

 

2,303

 

 

2,303

 

 

Corporate debt securities

 

100,681

 

 

100,681

 

 

Equity securities

 

 

 

 

 

 

 

 

 

Common stock

 

18,774

 

18,774

 

 

 

Non-redeemable preferred stock

 

248

 

248

 

 

 

Other investments

 

 

 

 

 

 

 

 

 

Note receivable

 

38,588

 

 

 

38,588

 

Warrants

 

21,789

 

 

 

21,789

 

Total

 

$

802,720

 

$

597,542

 

$

144,801

 

$

60,377

 

 

Level 1 financial assets

 

The Company’s Level 1 investments include cash and cash equivalent balances and actively-traded equity securities.  Cash and cash equivalents are carried at amortized cost, which approximates fair value.  Fair value of actively traded debt and equity securities are based on unadjusted quoted market prices.  The Company receives the quoted market prices from a third party, nationally recognized, pricing service.

 

Level 2 financial assets

 

When quoted market prices are unavailable, the Company utilizes a third party pricing service to determine an estimate of fair value, which is mainly used for its fixed maturity investments, such as private and corporate debt securities, federal agency and municipal bonds, and non-government mortgage and asset-backed securities.  The observable inputs utilized by the pricing service include interest rates, using either a market or income valuation approach to determine fair value.  The extent of the use of each market input depends on the asset class and the market conditions; and, for some securities, additional inputs may be necessary.  Based on management’s understanding of the methodologies used by this pricing service, all applicable investments have been valued in accordance with GAAP valuation principles.

 

 

14



Table of Contents

 

HILLTOP HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

(unaudited)

 

As the Company is responsible for the determination of fair value, we have control processes designed to ensure that the fair values received from third-party pricing sources are reasonable and the valuation techniques and assumptions used appear reasonable and consistent with prevailing market conditions. As part of these controls, we perform monthly quantitative and qualitative analysis on the prices received from third parties to determine whether the prices are reasonable estimates of fair value.  The Company’s analysis includes:  (i) a review of the methodology used by third party pricing services; (ii) where available, a comparison of multiple pricing services’ valuations for the same security; (iii) a review of month to month price fluctuations; (iv) a review to ensure valuations are not unreasonably stale; and (v) back testing to compare actual purchase and sale transactions with valuations received from third parties.  As a result of such procedures, the Company may conclude the prices received from third parties are not reflective of current market conditions.  In those instances, we may request additional pricing quotes or apply internally developed valuations.  However, the number of instances is insignificant and the aggregate change in value of such investments is not materially different from the original prices received.

 

Level 3 financial assets

 

The Company’s Level 3 investments include the term loan issued to SWS Group, Inc., or SWS, and the warrants issued to us by SWS.  Fair values are based on inputs that are unobservable and significant to the overall fair value measurement, and involve management judgment.  Inputs used to determine fair value include market conditions, spread, volatility, structure and cash flows. The extent of the use of each market input depends on the asset class and the market conditions; and, for some securities, additional inputs may be necessary.

 

The SWS term loan cash flow model utilizes yield estimates based on comparable securities in the market. Interest rate is the most significant unobservable input.  An increase or decrease in the discount rate would result in an increase or decrease in the fair value measurement of the term loan.

 

The warrants are valued utilizing a binomial model. SWS common stock price and its related volatility, an unobservable input, are the most significant inputs into the model and, therefore, increases or decreases to the stock price would result in a significant change in the fair value measurement of the warrants.

 

The following table is a roll-forward of the amounts at June 30, 2012 for financial instruments classified within Level 3.  The classification of a financial instrument within Level 3 is based upon the significance of the unobservable inputs to the overall fair value measurement.  The Company held no financial instruments classified within Level 3 during the six months ended June 30, 2011.

 

 

 

Six Months Ended

 

 

 

 

 

Balance at December 31, 2011

 

$

60,377

 

 

 

 

 

Net transfers in

 

 

Purchases

 

 

Sales

 

 

Realized losses

 

 

Net unrealized losses

 

(5,800

)

 

 

 

 

Balance at June 30, 2012

 

$

54,577

 

 

All net unrealized losses in the table above are reflected in the accompanying financial statements.  The Company had no transfers between Levels 1 and 2 for the six months ended June 30, 2012.

 

The following tables present the carrying value and fair value of liabilities where they differ in value at June 30, 2012 and December 31, 2011 (in thousands).

 

 

 

June 30, 2012

 

December 31, 2011

 

 

 

Carrying

 

Fair

 

 

 

 

 

 

 

Carrying

 

Fair

 

 

 

Value

 

Value

 

Level 1

 

Level 2

 

Level 3

 

Value

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notes payable

 

$

131,450

 

$

133,293

 

 

$

133,293

 

 

$

131,450

 

$

129,989

 

 

15



Table of Contents

 

HILLTOP HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

(unaudited)

 

4.              Reserve for Unpaid Losses and Loss Adjustment Expenses

 

A roll forward of the reserve for unpaid losses and loss adjustment expenses for the six months ended June 30, 2012 and 2011 is as follows (in thousands).

 

 

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Balance at January 1

 

$

44,835

 

$

58,882

 

Less reinsurance recoverables

 

(25,083

)

(43,773

)

Net balance at January 1

 

19,752

 

15,109

 

 

 

 

 

 

 

Incurred related to:

 

 

 

 

 

Current Year

 

59,340

 

56,775

 

Prior Year

 

2,273

 

330

 

Total incurred

 

61,613

 

57,105

 

 

 

 

 

 

 

Payments related to:

 

 

 

 

 

Current Year

 

(38,845

)

(37,059

)

Prior Year

 

(11,798

)

(6,700

)

Total payments

 

(50,643

)

(43,759

)

 

 

 

 

 

 

Net balance at June 30

 

30,722

 

28,455

 

Plus reinsurance recoverables

 

21,365

 

40,161

 

Balance at June 30

 

$

52,087

 

$

68,616

 

 

Incurred amounts related to prior years indicate that we experienced unfavorable development in incurred but not reported reserves as of December 31, 2011 and 2010, resulting in an expense in the six months ended June 30, 2012 and 2011, respectively.  The development in 2012 is a result of late reported claims from the 2011 accident year. Primary lines of business contributing to the 2011 accident year development were homeowners and fire and allied claims.

 

5.              Reinsurance Activity

 

NLASCO, Inc., or NLASCO, our wholly-owned property and casualty insurance holding company, limits the maximum net loss that can arise from large risks or risks in concentrated areas of exposure by reinsuring (ceding) certain levels of risk. Substantial amounts of business are ceded; however, these reinsurance contracts do not relieve NLASCO from its obligations to policyholders. Such reinsurance includes quota share, excess of loss, catastrophe, and other forms of reinsurance on essentially all property and casualty lines of insurance. Net premiums earned, losses and loss adjustment expenses, or LAE, and policy acquisition and other underwriting expenses are reported net of the amounts related to reinsurance ceded to other companies.  Amounts recoverable from reinsurers related to the portions of the liability for losses and LAE and unearned premiums ceded to them are reported as assets.  Failure of reinsurers to honor their obligations could result in losses to NLASCO; consequently, allowances are established for amounts deemed uncollectible. NLASCO evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities, or economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. At June 30, 2012, we had reinsurance recoverables of approximately $23 million, and no allowance.

 

NLASCO voluntarily participates as a Write Your Own carrier in the National Flood Insurance Program, or the NFIP.  The NFIP is administered and regulated by the Federal Emergency Management Agency (FEMA).  NLASCO operates as a fiscal agent of the Federal government in the selling and administering of the Standard Flood Insurance Policy.  This involves writing the policy, collecting premiums and paying covered claims.  All pricing is set by FEMA and all collections are made by the Company.

 

16



Table of Contents

 

HILLTOP HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

(unaudited)

 

The Company cedes 100% of the policies written by the Company on the Standard Flood Insurance Policy to FEMA; however, if FEMA were unable to perform, the Company would have a legal obligation to the policyholders.  The terms of the reinsurance agreement are standard terms, which require the Company to maintain its rating criteria, determine policyholder eligibility, issue policies on the Company’s paper, endorse and cancel policies, collect from the insureds and process claims.  NLASCO receives ceding commissions from NFIP for underwriting administration, claims management, commission and adjuster fees.

 

The effect of reinsurance on premiums written and earned for the three and six months ended June 30, 2012 and 2011 is as follows (in thousands).

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 2012

 

June 30, 2011

 

June 30, 2012

 

June 30, 2011

 

 

 

Written

 

Earned

 

Written

 

Earned

 

Written

 

Earned

 

Written

 

Earned

 

Premiums from direct business

 

$

45,193

 

$

41,602

 

$

43,070

 

$

36,460

 

$

85,934

 

$

80,287

 

$

80,311

 

$

71,156

 

Reinsurance assumed

 

1,666

 

1,417

 

1,401

 

1,271

 

3,104

 

2,776

 

2,671

 

2,521

 

Reinsurance ceded

 

(5,230

)

(6,824

)

(5,348

)

(5,163

)

(9,847

)

(11,713

)

(10,158

)

(10,177

)

Net premiums

 

$

41,629

 

$

36,195

 

$

39,123

 

$

32,568

 

$

79,191

 

$

71,350

 

$

72,824

 

$

63,500

 

 

The effect of reinsurance on incurred losses for the three and six months ended June 30, 2012 and 2011 is as follows (in thousands).

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Loss and loss adjustment expense (LAE) incurred

 

$

38,374

 

$

43,204

 

$

62,445

 

$

61,150

 

Reinsurance recoverables

 

697

 

(2,103

)

(832

)

(4,045

)

Net loss and LAE incurred

 

$

39,071

 

$

41,101

 

$

61,613

 

$

57,105

 

 

Multi-line excess of loss coverage

 

For all lines of business, the Company has excess of loss reinsurance covering $775,000 in excess of $225,000 retention on losses on any one risk.

 

Catastrophic coverage

 

As of January 1, 2012, the Company renewed its catastrophic reinsurance contract for its first and second layers of reinsurance.  Per the contract renewal, the Company changed its underlying coverage at ASIC to $6.5 million in excess of $1.5 million retention.  The Company has reinsurance for up to $162 million in losses per event in excess of the $8 million retention.  The reinsurance from $8 million to $50 million loss is comprised of two layers of protection: $17 million in excess of $8 million loss; $25 million in excess of $25 million loss.  The third layer provides coverage for $50 million in excess of $50 million loss; the fourth layer provides coverage of $50 million in excess of $100 million loss and the fifth layer provides coverage of $20 million in excess of $150 million loss. The fifth layer is not fully subscribed, with participants accounting for 79% of the total layer.  Accordingly, NLASCO retains 21% of the losses in the fifth layer.  NLIC and ASIC do not retain participation in any of the layers, other than the first $8 million and $1.5 million retention, respectively.  During 2012, all five layers can be reinstated one time for 100% of the original premium.  The third, fourth and fifth layer reinsurance contract renewed after June 30, 2012, in two layers, $50 million in excess of $50 million loss and $70 million in excess of $100 million loss, both of which are fully subscribed.

 

17



Table of Contents

 

HILLTOP HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

(unaudited)

 

6.              Income Taxes

 

The significant components of the provision for income taxes are as follows (in thousands).

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011