Yes and Not Yes

Hilltop Holdings (HTH) is a holding company whose only holding is the insurance company NLASCO.

NLASCO “specializes in providing 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.” This sounds to me like NLASCO caters to trailer parks and the manufactured homes.

NLASCO has excellent underwriting discipline. According to Hilltop’s most recent 10-k:

The industry aggregate for combined ratio for 2006, was 92.5%, well above the combined ratio for NLIC of 78.9% for the same period. NLIC was rated #2 in National Underwriters Property and Casualty magazine 50 Profit Champions. NLIC six year average combined ratio was 80.7%, well below the industry six year average of 102.4%.

For those not familiar with the insurance industry, the combined ratio is a measure of underwriting profitability. A ratio below 100% indicates that the company is making underwriting profit while a ratio above 100% means that it is paying out more money in claims that it is receiving from premiums.

Also, I like that the President of NLASCO has an annual incentive award that is based upon attaining a combined of 90% or less. This is good because performance is based on underwriting profit, not volume. In the insurance business, when underwriting profit and discipline is sacrificed for the amount of premiums written, this creates the potential for huge problems down the road. More people will be filing claims and the insurance company will most likely have not set aside enough money for loss reserves.

With the recent sale of its business related to manufactured home communities, Hilltop has about $770 million in cash on its balance sheet and is looking to make some sort of acquisition. Hilltop has stated that it’s open to all possibilities regarding the type of business it will acquire.

Based on the strength of the insurance underwriting alone, Hilltop looks very interesting. If Hilltop were to diversify and strengthen its insurance operations via an acquisition of another insurance outfit, I will take a more serious look at possibly acquiring some shares.